Pressure on Greece mounted this week. Eurozone finance ministers gave it a month to convince them that its budget- deficit-cutting plan is rigorous enough. If they’re not convinced then the EU will “impose… additional measures” in mid-March, said Jean-Claude Juncker, Luxembourg’s premier.
There was no further detail on what form a possible bail-out might take. Last week leaders merely delivered a vague pledge to take “determined and co-ordinated action” to safeguard the eurozone’s stabililty, while making clear that Greece had to do whatever it took to bring its deficit down. Meanwhile, the EU demanded a detailed explanation of the derivatives transactions between Athens and various investment banks earlier this decade that kept public debt off the books.
What the commentators said
This “off-balance-sheet accounting” is a reminder of how Wall Street helped create the subprime crisis, said Louise Story in The New York Times. In 2001, for instance, Goldman Sachs helped the Greek government “quietly” borrow billions. The complex swap transaction was treated as a currency trade, rather than a loan, helping Greece meet Europe’s deficit rules. Such deals compound the uncertainty over just how bad the situation is and which other governments have fiddled the figures.
The main problem now is the mounting pressure on a monetary union that looks increasingly “unworkable”, said Ambrose Evans-Pritchard in The Daily Telegraph. What if Greece can’t, or won’t, slash the deficit? Cuts have barely begun and already a general strike looms. The risk with an “IMF-style austerity package without the IMF cure of devaluation” is that the recession will worsen, deepening the country’s debt problems and fuelling further unrest. Cutting a budget deficit from over 12% to 3% in three years would cause a “depression”, agreed John Mauldin of Investorsinsight.com. But a German-led bail-out is unlikely to end the problem. Portugal and Spain could be next, with the latter too big even for Germany to rescue.
There are also the possible ramifications for the eurozone banking system to consider. A potential flashpoint arises this spring, when Greece has to refinance a large chunk of debt. All peripheral countries’ bonds will be sold off sharply, prompting widespread write-downs in the European banking system and a further credit squeeze, said Wirtschaftswoche. With the EU having put off its assessment of the Greek budget plan until mid-March, the markets have another four weeks to ponder such scenarios. Little wonder the atmosphere, says Jamie Chisholm on FT.com, is becoming “ever more febrile”.