Turkey & Macedonia

Eurozone split as it takes fresh stab at Greece July 10, 2011

Eurozone leaders head into fresh talks Monday to craft a new rescue package for Greece hoping to bridge widening splits over private sector involvement as Europe’s debt crisis threatens to spiral.

After a tumultuous week that saw debt contagion hit Italian banks and Spanish bonds, and borrowing costs peak for eurozone struggler Ireland, finance ministers from the 17-nation area meet from 1300 GMT. Their counterparts from the full EU 27 will join them on Tuesday.

Gathered just a week after plucking Athens from default this summer — clearing a 12-billion-euro ($17 billion) slice due from its first 2010 bailout — eurozone leaders have delayed a final decision on a second rescue until September. Observers are not expecting a quick fix at this week’s talks.

Instead, it will focus on how to get banks to bear a fair share of involvement in a second Greek bailout — and in such as a way as to avoid it being interpreted as a credit default that would ripple across the single currency zone.

The prickly issue in the last days has exposed sharp splits in the euro-front, and comes days ahead of much-awaited July 15 data on European bank stress-tests.

Differences that flew into the open after a market-rattling decision last week by Standard & Poor’s ratings agency need to be addressed swiftly, EU sources said.

“We will have to weed out the different ideas,” one source said. “We cannot delay, we need to be on the right track to be ready for September.”

European leaders have been working for weeks on drawing private bondholders into a second rescue of Greece tipped almost as big as last year’s 110-billion-euro bailout, either by voluntarily buying new Greek bonds when current bonds come due, or swapping them for new, longer-maturing bonds.

Touching off a powder-keg response, S&P poured cold water Monday on a proposal from France, for private creditors to opt to replace Greek debt about to mature with new 30-year bonds. French banks hold a sizeable proportion of Greek debt.

Such a debt rollover “could result in a selective default for Greece,” said S&P, meaning Greece would be technically in default, even if the rescheduling was voluntary.

The hotly contested view undermined weeks of efforts while raising fresh calls from some governments to force the private sector to join taxpayers in rescuing Greece — whether or not this came down to a default.

“I think we have to accept that a voluntary contribution is not realistic,” said Dutch Finance Minister Jan Kees de Jager.

“If a compulsory contribution gives rise to a short and isolated rating event, then it’s not so bad,” he said, using a term which refers to a default rating.

In signs that sentiment may be shifting, German Finance Minister Wolfgang Schauble too came out in favour of a debt swap that would be tantamount to a debt default, or restructuring.

The plan to involve the private sector has won backing from key global finance group, the Institute of International Finance (IIF), which represents banks, insurers and investment funds, and which has held talks in Europe this week.

But European Central Bank chief Jean-Claude Trichet is sticking to his guns.

“Credit events, or selective default, or default, we say no, full stop.”

Finland meanwhile wants guarantees from Greece over and beyond a four-year austerity plan and ambitious privatisation scheme, that would see its national heritage held as collateral.

With pressure building on Italy as markets closed Friday, eurozone leaders are aware that time is of the essence to prevent contagion from Europe’s sovereign debt crisis.

Banks will come under further scrutiny too from the ministers ahead of the publication Friday of the results of stress tests on 91 banks representing 65 percent of Europe’s banking sector.

The tests were designed to combat criticism over last year’s banking sector review which found that just seven out of the 91 European banks inspected were vulnerable to economic stress.

Those cleared included Irish banks that subsequently needed billions more in bailout funds.

Europe cannot afford to rescue Greece March 12, 2010

To bail out Greece or not? The question is grabbing headlines daily. Supporters of a bail-out argue that if Greece collapses, others would follow. Financial markets have already identified the next candidates. As such, European economic and monetary union is at risk. Only financial aid and “solidarity” with highly indebted members can rescue the euro.

It is certainly true that this is a decisive moment for Emu – but for the opposite reason. Greece will continue to receive support from several European Union funds. But financial aid from other EU countries or institutions that amounted, directly or indirectly, to a bail-out would violate EU treaties and undermine the foundations of Emu. Such principles do not allow for compromise. Once Greece was helped, the dam would be broken. A bail-out for the country that broke the rules would make it impossible to deny aid to others.

It seems that quite a number of observers have forgotten what Emu is, and what it is not. The monetary union is based on two pillars. One is the stability of the euro, guaranteed by an independent central bank with a clear mandate to maintain price stability. The other is fiscal solidity, which has to be delivered by individual member states. Member countries are still sovereign. Emu does not represent a state; it is an institutional arrangement unique in history.

In the 1990s, many economists – I was among them – warned that starting monetary union without having established a political union was putting the cart before the horse. Now the question is whether monetary union can survive without such a political union. The current crisis must be handled in such a way as to produce a positive answer. The viability of the whole framework – nothing less – is at stake.

By joining Emu, a country accepts its rules. Greece, moreover, also knew that adopting a stable currency that was not controlled by its own central bank implied a total break with the past. Devaluation of the national currency and an inflationary monetary policy were no longer options. A single monetary policy is implemented by the European Central Bank and it is the responsibility of each country to adjust its economic policies so that this one size fits all.

Participation in Emu brings huge advantages. The benefits of joining a stable economic area are greatest for countries that were unable to deliver such conditions before. Thanks to the euro, Greece has enjoyed long-term interest rates at a record low. But instead of delivering on its commitment at the time of entry to reduce public debt levels, the country has wasted potential savings in a spending frenzy. The crisis with which it is now confronted is not the result of an “external shock” such as an earthquake, but the result of bad policies pursued over many years. Bailing out Greece would reward such behaviour and create moral hazard of a dimension hardly seen before.

In this context, one conclusion becomes obvious: financial assistance for countries that violated the terms of their participation in Emu would be a major blow for the credibility of the whole framework. By its construction, Emu is a “no transfers” community of sovereign states. Transferring taxpayers’ money from countries that obeyed the rules to those that violated them would create hostility towards Brussels and between euro area countries. Among ordinary people, it would undermine a badly needed sense of identification with the great project of European integration.

This moment is a turning point for Emu, and for the future of Europe. Most observers point to the high risks – which cannot be denied. However, any crisis also presents an opportunity. This is a big chance – probably the last for Greece, and others – to adapt fully to a regime of stable money and solid public finances.

For Emu, the crisis represents a final test of whether such an institutional arrangement – a monetary union without a political union – is viable for an extended period of time. Lax monitoring and compromises when it comes to observing implementation of rules have to stop. Emu is a club of states with firm rules accepted by entrants. These rules must not be changed ex-post. Governments should not forget what they promised their citizens when they gave up their national currencies.