It’s groundhog day in the eurozone, says Welt am Sonntag. A year ago, the most urgent problem facing European governments was preventing Greece from running out of money. Today, it’s exactly the same story. The crisis took a dramatic turn last week as a German magazine, Der Spiegel, reported that finance ministers were holding a secret meeting to debate a Greek exit from the eurozone. Discussion of exit scenarios was strongly denied, but policy-makers did hold a meeting and have now conceded that Greece “does need a further adjustment programme”, says Luxembourg’s prime minister Jean-Claude Juncker. Ratings agency S&P has marked Greek debt down yet again, pushing it further into junk territory.
Why Greece needs more help
Greece agreed a €110bn bail-out package with the EU and the International Monetary Fund (IMF) last year. That was supposed to tide it over as it reformed its economy and got its debt under control. By 2012, it was supposed to be well on the way to turning the corner and thus able to borrow from the international markets again. But Greece is making much slower progress then everyone expected, according to members of Germany’s governing coalition, cited in Welt am Sonntag. “Worse,” they say, “it’s falling short on its promises.” Reforms “have stalled, the economy is in a tailspin, and progress towards a modern tax collection system has been slow”, say David Oakley and Kerin Hope in the FT. The overall debt pile is hurtling towards 160% of GDP and with the economy shrinking fast there is no hope of getting it under control. Under these circumstances, yields on Greek debt are sky high – there is no way it will be able to raise money in the markets next year.
Will it get it?
The bottom line is that Greece’s debt load needs to fall by 50% or more if it is to become sustainable, says WSJ.com. That implies that bondholders will lose around half their money. The problem is that “this sort of default” will prove a huge burden for Greece’s big lenders. “Even with the sort of regulatory fudges that have allowed banks to hide their losses since the start of the financial crisis, it would be impossible for a Greek default big enough to help Greece not to have a big impact on German and French banks.” Indeed, European officials have ruled out a restructuring, whereby creditors lose a chunk of the money they are owed, for fear of a Lehman-style chain reaction in the highly interlinked European banking sector. So the likelihood is that Europe will soon announce softer options, such as just lending Greece more money or extending the maturities on the loans. Yet this is simply buying time, as Greece is so deep in the hole that restructuring is “inevitable”, says Lex in the FT.
Is there the political will for a real solution?
It should be possible for the eurozone to mitigate the systemic impact of restructuring with a clear plan, including making banks beef up their capital levels in advance. But that would require a level of political co-ordination and plain speaking that has so far eluded policy-makers. Indeed, the worry is that “the eurozone is politically incapable of handling a crisis that is now contagious and has the potential to cause huge collateral damage”, says Wolfgang Munchau in the FT. The ‘grand bargain’ trumpeted in March failed to get ahead of events. And the “bungling of a not-so-secret gathering” last Friday prompts the thought that if finance ministers can’t organise a private meeting, they are hardly likely to be able to solve a debt crisis. The immediate worry is that the latest jitters over Greece will lead to a sell-off in peripheral debt markets, increasing Spain’s borrowing costs and dragging it back into the crisis. Ireland and Portugal may also insist on easier terms if Greece gets more money. The European debt crisis, says Capital Economics, “may be entering a new and more dangerous phase”.