Euro crisis: “The fix is not in. A line has not been drawn. And tensions are rising.”

What to make of the news emerging at the end of the two-day EU summit in Brussels?

It depends.  The RTÉ report tells us

The EU is battling to stem a debt crisis that has raged for over a year and led Ireland and Greece to accept bailouts.

It had promised to unveil a comprehensive solution at this summit that it hoped would reassure jittery markets.

But the abrupt resignation of Portuguese Prime Minister Jose Socrates on the eve of the meeting, after his austerity measures were rejected by parliament, cast a long shadow.

Uncertainty in other euro members such as Finland also prevented leaders finalising fundamental elements of their plan.

‘The euro has survived a critical test but there is lots of homework to be done,’ German Chancellor Angela Merkel told reporters, saying the union needed to ‘atone for past sins’.

She added: “This is a comprehensive package which I think is a big step forward. Whether it will be sufficient, only time will tell.”

And the report carried by the Irish Times adds

Leaders were able to seal a deal on funding for the European Stability Mechanism (ESM) a new, permanent safety net that will become operational from mid-2013.

Ms Merkel backtracked before the summit on a deal that would have forced Germany, Europe’s biggest economy and paymaster, to put up €11 billion for the fund in its first year, reducing her wiggle room for tax cuts before the next election.

Under the compromise, capital injections totalling €80 billion for all euro zone members will be spread out over five years rather than three, with smaller instalments.

Euro zone leaders also formally backed the “Euro Plus Pact” [added link to pdf file], a list of areas for expanded economic policy harmonisation which has been renamed three times because of sensitivities in various individual member states.

Six EU states that do not use the single currency – Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania – joined the 17 euro states in backing the pact, in part out of worries they could be excluded from future policy talks.

Britain, Sweden, Czech Republic and Hungary remain out. In other areas the summit fell short of expectations.

Although leaders had agreed in principle earlier this month to boost the lending capacity of their temporary safety net – the European Financial Stability Facility (EFSF) – to €440 billion from roughly €250 billion, they had to push this back until mid-year because of a pending election in Finland.

Concerns are growing that Irish banks could require more capital than the €35 billion set aside for them under last year’s EU/IMF bailout.

Portugal is widely expected to be the next euro zone domino to fall after Ireland and Greece.

And the Telegraph’s Jeremy Warner adds [that wasn’t his original headline – Ed] I know.

Like everyone else, I’m fast losing the will to live in writing about the eurozone’s seemingly interminable crisis. Apparently, European leaders have held yet another summit in which they have endorsed a new “Euro Plus Pact” on governance and rubber stamped a pre-negotiated enlargement of the European Financial Support Facility (EFSF). Only they are going to need a further summit still sometime in May or June to agree the detail. Nothing can be done before then because of Finnish elections next month, which might overturn the present pro-European consensus.

And the BBC’s Europe editor, Gavin Hewitt, points to a north/south fault line – on which Hans-Olaf Henkel would probably agree.

And he, Gavin Hewitt that is, sees a shadow over Europe…

In Ireland – despite a bail-out – the crisis is not yet over. The new government says that the bill to bail out the sickly banks is still growing. It may need a further rescue. Otherwise the threat is there. Investors, including French and German institutions, will have to be burned. There will be further bank stress tests next Thursday. The Irish government is hemmed in. There is growing hostility towards Brussels. The public won’t take more austerity.

And even though the bail-outs have bought some breathing space they have not solved the fundamental problem. Greece has had the interest rates of its loans reduced and its repayment period extended, yet the country shows no sign of being able to grow its way out of its debt crisis. Its tax revenues are actually falling. Growth is elusive. Sooner or later Greece will have to face its debt mountain.

Chancellor Merkel offers no relief. “Member states,” she said at the summit, “face many years of work to atone for past sins”. And that’s part of the problem – countries like Greece, Ireland and Portugal will be taking the austerity medicine not just for this year, but quite possibly for a generation.

As Charles Grant from the Centre for European Reform observes, “there may be a time when, even if politicians want to do the right thing for the euro, the public will not allow them to do it.”

Brussels is often a strange world. There is a Panglossian upbeat tone to much of what is said publicly, whilst economist after economist predicts a restructuring of the debt is coming.

This was supposed to be the summit that delivered the comprehensive package to end the eurozone crisis. It hasn’t. Three months of uncertainty lie ahead. The fix is not in. A line has not been drawn. And tensions are rising.

I did ask, how is the collective mood now?

, , , , , , , , , , , ,

  • Mack

    Last night’s prime time really is worth watching – see here-

    http://www.rte.ie/news/av/2011/0324/primetime.html#

    Constantin Gurdgiev appears to put the fear of God into the German journalist (Mark Schieritz)

    One standout stat – Irish aid to Germany through the bank guarantee is €26bn vs German aid to Ireland through the EFSF of €16bn (@ almost 6% interest!)…

  • Drumlins Rock

    But Ireland had turned the corner, hadn’t it?

  • Pete Baker

    Mack

    “Irish aid”?

    Or repayment of debt compared with subsequent loans?

  • Mack

    Come on Pete you are well enough read at this stage to know the facts.

    Irish taxpayers making private bondholders in bankrupt private Irish instituitions whole are providing aid to those bondholders. Irish taxpayers are doing it (or were doing it) because their government felt it would protect our banking system. By extension we were / are protecting theirs (German / French / British etc). We now know the guarantee has failed in protecting the Irish banking system, but we are being forced to continue to provide aid to the European bondholders (to protect European banking systems).

    FWIW, the average person on the streets now thinks it’s entirely the banks fault (i.e. no Irish fiscal prolificagcy at all). There is enough misinformation without informed commentators taking deliberately contrary positions 🙂

  • Pete Baker

    Mack

    You’re not answering the question.

    “repayment of debt compared with subsequent loans?”

    Or “Irish aid”?

    “There is enough misinformation without informed commentators taking deliberately contrary positions.”

    Indeed.

  • Mack

    “repayment of debt compared with subsequent loans?”

    Or “Irish aid”?

    The later. If the banks repaid the debt themselves it would be the former. But they can’t so the state is stepping in providing what amounts to state aid to Irish and by extension European banks (as that is where the next step in the money chain – and / or future debt deflation path downwards – Irving Fisher, how are ye?)

  • Pete Baker

    It’s still the repayment of debt, Mack.

    You’re just quibbling about who owes the debt.

    “If the banks repaid the debt themselves it would be the former. But they can’t.”

    Indeed.

  • John Ó Néill

    @ Mack

    “FWIW, the average person on the streets now thinks it’s entirely the banks fault (i.e. no Irish fiscal prolificagcy at all).”

    In fairness – if the ‘average person on the streets’ followed the MSM they have been badly served to date (since that is where they have drawn their positions from). This week Fine Gael were floating their newly-discovered ‘burn the bondholders’ strategy – although I didn’t notice the widespread scoffing of this as a tactical position (despite the fact that they have now moved very far from their ‘honour all the debts’ delusions at the start of the year)…
    There was plenty of fiscal profligacy, but the banks did provide misleading information at the time of the guarantee so they are hardly blameless (and next week’s shockingly bad stress test results will still be feigned as a surprise as if anyone would believe the Irish banks anymore). You are entirely correct to regard the socialisation of private debt from German banks etc as an ‘Irish bailout’ to German, French and UK banks (it’s the Healy-Rae/Lowryesque parish pump on a European scale).

    If you burn/haircut the bondholders of the banking debts and did the maths – what level of interest could sovereign bonds absorb if the state rejected the private debts run up by senseless lending by Irish banks and their constituent lenders (i.e. remove the socialised bank debt from the state’s balance sheet)? The Irish banks were a disaster (and permitted and under-regulated to be so) but their credit lines should have dried up – those that lent to them didn’t do their own homework. The bottom line is that the state will be able to borrow at the rate the ‘market’ feels will return a profit. If the state wasn’t repaying the bank debt plus the punitive (EU) interest, it could probably manage a 10-11% interest rate.

    Instead, this time next week the state will be looking to be a further 50 bn in hock via the banks (although that figure may be 10 bn short or more if previous episodes are anything to go by). It will only be able to borrow from the IMF or ECB. The latter, at punitive interest rates, will haggle over state-owned assets and other matters as, paradoxically, the Irish taxpayers bails out the German, French, UK banks, etc. Its not defensible.

  • Mack

    I don’t disagree with a lot of what you’ve written. I guess you are feeling a little sore at the treatment of SF for their ‘burn the bondholders’ policy? To my mind SF strategists seemed to pick vote getting populist rhetoric over a coherent, holisitic and credible strategy. I.e. safe in the knowledge they wouldn’t actually be in government they promised voters a rosey and fair outcome. From their perspective that was probably the right decision and it worked well. From the persepective of those who would be in government dogmatically insisting they wouldn’t socialise debts would seriously limit their negogiating options once in government.

    There is a good chance the EU will fall apart because of the dogmatic position taken by politicians in the core at the outset of this crisis (Thursday’s Prime Time being very informative in my opinion in that regard). Electorally, they are now hung on their own petard. We may well end up in SF policy teritory yet. but I don’t there’ll be a rose garden.

    FG’s position was pretty fluid as far as I could tell. There were a lot of personel changes at the top, and the known position of banks deteroirated seriously in the last year. It wasn’t that long ago that Ronan Lyons detailed how the scale of the fiscal crisis was bigger than the banking crisis – it’s unlikely he believes that now..

    I think in your scenario we’d have to take our chances outside the Euro. At 10% interest and having imposed haircuts on creditors our banks would be shut out of the markets. So they’d be relying on the government to borrow at 10% to provide them with funds for mortgages etc (13% variable rate mortgage while the ECB rate is 1% or so ??) and perhaps short-term liquidity etc. if the ECB cut us off.

    We’re paying an average of 3.5% on 110% of GNP or so at the monent. Rolling that over into 10% of 110% or 150% of GNP probably isn’t (15-20% of GNP going on interest payments? Ouch…)..

  • John Ó Néill

    Mack – at a wider level, the ‘austerity’ package to service the bank debt on top of sovereign debt will simply kill off any potential growth – that scenario forced the state out of the bond markets. Ironically/paradoxically, no-one could consider lending to the state in that scenario. Yet, remove the bank debt, have some scope for stimulus and there may be more potential for growth and, arguably, a greater facility to repay any sovereign debts. The markets will lend at the market rate if they think it is going to be paid back, with the interest rate flagging their evaluation of the risk (10% is obviously edging into sub-prime loan shark territory, 6% used to be regarded as indicating high risk). With the socialised bank debt there is a critical risk of default across the board. Without that bank debt, the risk of defaulting on sovereign debt is much reduced.

    As to coherent, holisitic and credible strategy – I don’t think any of the parties really managed to put a workable solution forward but in the end their indivdual strategies are obviously irrelevant now the election is over. FG’s fluidity (nice metaphor for not actually having a coherent, holistic or credible strategy) amounted to staying light on detail and little more since the election was always theirs to lose not win.

    Next week is the first major crisis for the coalition and it could well be of epic proportions. Against the backdrop of Portugal teetering on the brink, the gravitational pull of the black hole in the Irish banks (that will be opened up by the stress tests) will suck in every pre-election manifesto and programme for government promise.

  • Old Mortality

    John
    “the ‘austerity’ package to service the bank debt on top of sovereign debt will simply kill off any potential growth”

    I don’t think it’s troubling the exporters (up 9.4% last year). That’s the kind of growth that everybody wants. If a civil servant can’t afford a new Toyota, so much the better.

  • tuatha

    How can the ‘new’ government, elected because of outrage at the previous shennanigans, DARE to still be considering covering the growing bank debts.
    Last year NAMA seemed to be moving towards acknowledging that the ludicrous ‘values’ assigned to the various bad loans wouldneed to be rationalised.
    What happened, has the government received its riding instructions already?

  • Mack
  • Quote >> Chancellor Merkel offers no relief. “Member states,” she said at the summit, “face many years of work to atone for past sins”. And that’s part of the problem – countries like Greece, Ireland and Portugal will be taking the austerity medicine not just for this year, but quite possibly for a generation.

    ———————

    A “member state” consists of bank and governments, not countries and people that live there.

    She is quite correct that these entities face many years of work to atone for past sins. Unfortunately for them, they do not know how to work, so I guess they will be atoning for much longer than a generation.

    The Lisbon Treaty has infringed on your sovereignty in the areas of taxation, family issues and state neutrality, therefore, you have the right to:

    1) Declare an Article 27 referendum to default on bank and government debt.

    2) Watch the fireworks.

    http://www.youtube.com/watch?v=uELhEYbZIy8

    3) Print the Punt. It is your right as a sovereign nation to liquefy your markets so things can get done again.

    http://heddinout.com/?p=1988

  • Mack

    What is that? A whole site full of web-bots auto posting links and mashed up semi-related content from elsewhere?

  • Mack says: “What is that?”

    I assume you are referring to Metaforia on http://heddinout.com/

    I don’t think our site can be easily categorized.

    Judging by your description, I would say you agree.

    Cigar?