Euro crisis: “it is the fear of the unknown that is holding sway”

Frau Bundeskanzerlin has been to Washington, to pick up her Presidential Medal of Freedom.  And to smooth over the ruffled feathers of that transatlantic relationship.  As he handed over the medal, US President Barack Obama warned of the danger of the Euro debt crisis impacting the global economy, and in particular, the US economy.  He might be looking for a handy scapegoat in the months ahead…

But as, still everyone’s hero, Robert Peston points out “America’s banks would seem to have a good deal to lose if Greece were to go kaput.”  And that’s before he considers Ireland and Portugal.  Which he does.  And then there’s Spain…

And in the case of Spain, the actual and potential exposure of US banks is a knee-trembling $179bn – so there is a powerful American interest in the eurozone’s rot stopping with Greece, Ireland and Portugal.

All this helps to explain why the US administration has been taking a close personal interest in the eurozone’s troubles – and why the US has been making it clear that it would prefer there weren’t a “credit event” that could be described as a Greek default.

On Chancellor Angela Merkel’s return to Germany there’s the small matter of “signs of growing unrest in party ranks over further aid to Greece and the permanent euro zone rescue fund.”

Many MPs feel they are being bounced into backing further Greek aid and a wider bailout regime. Although Berlin does not need Bundestag parliamentary approval to release Germany’s next tranche of Greek aid, this week’s vote is nevertheless a crucial barometer of Dr Merkel’s parliamentary support ahead of the vote on the euro zone rescue fund expected in the autumn.

Senior government officials, fearing the worst, concede the vote is “more than just symbolism”.

To make matters worse, the German Finance Minister, Wolfgang Schaeuble, is openly speculating about a Greek default.  Irish Economy are discussing the possible implications for Ireland.

Today’s Irish Times editorial calls for Irish politicians and policymakers to prepare for the worst.  And for the less worse.

Irish politicians and policymakers will have little say in whether Greece defaults, but they need to prepare for the worst. If default happens and it triggers a meltdown, the social, political and economic consequences would – in the worst-case scenario – be of an order never before faced by independent Ireland. Over the past three years previously unthinkable occurrences have become almost commonplace. It would be gross negligence for the authorities not to plan for the worst.

But a more benign outcome should also be planned for. If a Greek sovereign default were to be absorbed by financial markets without causing meltdown, the case for sparing senior bondholders in Irish banks would all but disappear. If markets prove able to handle a sovereign default they will manage the restructuring of senior bank bonds. That eventuality should be planned for too.

In Greece, it’s not looking good.

Sources briefed on the talks, which continue today with a delayed meeting of the Pasok parliamentary party, acknowledged the going was very tough. Kathimerini, the Greek daily, described the increasingly febrile atmosphere as akin to a political “nervous breakdown”.

Mr Papandreou has called a formal cabinet meeting for tomorrow, after which he will bring the plan to parliament. He told his ministers on Monday an election would be a “catastrophe” but left open the possibility he might seek a referendum on the bailout plan, one local analysts say would be likely to be defeated.

Although the country’s international sponsors want a swift vote on the plan, sources within the Greek government insist this cannot be done until EU leaders give their assent to the plan at a summit in Brussels on June 24th and 25th. Mr Papandreou wants to put all the measures to a single parliamentary vote but Pasok MPs are resisting that.

And, with the European Project teetering on the brink, BBC Europe editor Gavin Hewitt thinks that fear of the unknown will probably win.

There have even been suggestions that the package might be put to the Greek people in a referendum. It would be a bold move to consult the people.

In the end fear will probably win. The can will be kicked down the road. Very few people believe that Greece can find sufficient growth to slim down its mountain of debt. Sooner or later there will be a default.

What most European leaders are doing is playing for time. If Greece defaults in three or four years’ time then Europe’s banks may be stronger and healthier. The Institute of International Finance said a second bail-out “will buy some time but will still leave Greece’s debt sustainability probably unresolved”.


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