Effort Aside, Europe Fails to Halt Debt Crisis

Monday, 09 May 2011 01:54 PM

 

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No matter how hard Europe tries, it just can't get a grip on its sovereign debt crisis.

Since late 2009, when Greece's vast budget and debt problems first materialized, the European Union has strived to come up with solutions, from fiscal adjustment programs to labor market reforms and financial bailout packages.

In EU terms, seldom have so many multi-billion-euro decisions been taken in so short a time under such pressure.

Getting the 17 countries that share the euro, and the broader EU, to agree emergency loans for Greece, Ireland and Portugal, as well as to organize a 440 billion euro temporary bailout mechanism and a 500 billion permanent one, all in the space of a year, is unprecedented in both speed and scope.

Despite all that effort — involving countless late-night euro zone summits, the expending of political capital and the striking of last-minute deals to satisfy one constituency or another — the crisis shows no signs of slackening.

"From the start they have misdiagnosed the problem — they haven't come clean about what the problem is and hence the medicine is all wrong," said Simon Tilford, chief economist of the Centre for European Reform in London.

A combination of miscommunication and second-guessing, with commitments unraveling sometimes only days after being made, has left European leaders scrambling to satisfy voters, financial markets and the EU's institutions — and often failing to keep any of them happy for long.

Whenever a decision has been taken, cracks have tended to emerge.

This has opened the way for doubts about a nation's resolve or in some cases to "bailout arbitrage" — with one country perceiving another's terms to be better and wanting to renegotiate its own package.

Perhaps the clearest illustration of Europe's management was a "secret" meeting in Luxembourg last Friday, when the finance ministers of Germany, France, Italy, Spain and Greece got together with the European Central Bank chief and the EU's monetary affairs commissioner for private talks.

First, news of the meeting leaked. Then it had to be denied that it was convened to discuss either Greece leaving the euro zone or a restructuring of Greek debt. Then other euro zone member states, including the Netherlands and Austria, expressed irritation at not having been invited.

Not surprisingly, financial markets further marked down the value of Greek debt on Monday and questions were raised about what the meeting was meant to achieve, given that it was not a proper forum for taking decisions.

As economic commentator Wolfgang Munchau pointed out: "They cannot even organize a private meeting. How, then, can they solve a debt crisis?"

NOT ENOUGH STRAIGHT TALKING

Some economists argue the EU opened the way for its current fix by not being straight at first about what the crisis meant and trying to talk around the problem.

German Chancellor Angela Merkel used to refer to the "euro crisis," but it has never really been about the currency, which today stands at almost exactly the same level against the dollar as it did in December 2009.

While it has always been about sovereign debt, it is also about troubled banks, particularly those in France and Germany which have large amounts of Greek, Irish and Portuguese bonds on their books. If a government defaults or the debt is priced down, the repercussions could be huge.

It is also not really about "bailouts," which gives the impression that Greece, Ireland and Portugal are being written blank checks they need not repay.

They are actually getting financing, albeit at interest rates way below what the market would demand — effectively being leant more money to get over their debt problems.

"Quite clearly, the problem in the case of Greece, Ireland and Portugal is that investors have justified doubts about the ability of those countries to grow sufficiently quickly to service their debts," said Tilford. "In Portugal, the EU sees this as a liquidity crisis, but it's really a solvency crisis."

EU leaders and senior officials may be slowly coming around to speaking more directly about the crisis.

A month or so ago, the phrase "debt restructuring" was never uttered, let alone entertained. It is still not accepted as a possibility, but at least it is now being murmured.

Irish Prime Minister Enda Kenny was more straightforward on Monday in describing his country's situation. "We carry a heavy burden of debt," he said. "Without strong growth, questions of sustainability will remain."

It now seems likely the terms of Ireland's 85 billion euro bailout, agreed in November, will be reworked even though EU officials insisted in recent weeks it is too soon to consider such a move. Greece is also likely to get more time to pay back its 110 billion euros of loans at a lower rate, sources say.

Analysts say EU leaders and officials are still not addressing the problem directly, and remain a long way behind financial markets. In that gap rests the EU's credibility.

"At the end of the day, I don't think there's any real way around the restructuring of the debts of Greece, Ireland and Portugal," said Tilford, adding that the EU would probably take some time to acknowledge this.

"They'll try to push it down the road, there'll be soft restructurings first and then harder ones, but one way or the other, that's what they'll have to end up doing."

© 2014 Thomson/Reuters. All rights reserved.

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