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Eurozone as we have known it: end of story
03/11/2011
1. Greece
Tuesday’s announcement by the Greek Prime Minister, Georges Papandreou, of an
impeding referendum on the second rescue package concluded a few days before sent
market rolling and policy makers tangling in despair and frustration.
It was doubtful that this rescue package would work, but at least it was buying (wasting) a
bit more time.
Interesting enough Wednesday’s evening discussion between Merkel, Sarkozy and
Papandreou ended up for the first by mentioning the exit of euro for Greece if Greeks vote
no to the rescue package, which so far was dumb impossible… As I wrote to JC Juncker in
July, Europe lacks credibility and its first task should be to reinstate it: For 2 years, the
opposite way has been followed by a succession of denials and scapegoating.
If I were Greek, I would go straight away to my bank and get all my cash to hide it under
the mattress; so, expect a run on Greek banks that are bankrupted anyway with their load
of junk Greek sovereign debt.
November-December 2011 debt redemption schedule:
11 November: EUR 2 bn (26 wk T bills) + 49 mio interest
18 November: EUR 1.6 bn (13 wk T bills) + 18 mio interest
12 December: EUR 2 bn (26 wk T bills) + 50 mio interest
23 December: EUR 2 bn (13 wk T bills) + 46 mio interest
According to Papandreou, Greece has enough money to survive until mi-December, so just
after the referendum due to take place 4th December.
Well, if there is a referendum (there are rumors it would be called off; what a farce!!):
Papandreou called a vote of confidence for Friday; if he does not win then new elections
would be called and the referendum becomes history. The EU and IMF would provide
Greece with its EUR 8 bn 6th tranche from the first EUR 110 bn rescue package.
Alternatively a Government of national union could be formed with the opposition. This
would be the best outcome for the EZ and the euro.
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2. Italy
Friday’s bond auction witnessed an interest rate increase to 6% (so before Papandreou
referendum announcement) and since, borrowing costs have reached a record high (10
year bonds reached a high of 6.399% today), not seen before the creation of the euro. The
cost of debt is not sustainable.
Wednesday evening Berlusconi could not get cabinet approval when his Northern League
ally refused to increase the retirement age from 65 to 67 years as demanded by Merkel-
Sarkozy for the G20 meeting in Cannes, which castes doubts about Italy’s ability to
implement unpopular measure to reduce its (slowly) mounting debt.
Whilst Italy’s economic situation is on many indicator much less worse than France’s, its
weak political system, large legacy debt and slow growth are making the country the target
of markets.
France is however not far behind.
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3. France
On many indicators, France is in a worse situation of Italy: debt increase (will soon catch
up Italy), primary budget deficit, trade balance and unemployment.
The 2012 budget is based on a 1.75% real GDP growth that will not be reached: the
consensus stands at 0.9%. This means finding EUR8-9 bn to maintain the objective of
deficit reduction down to 4.7% in 2012 and 3% in 2013. However, most of the rumored
measures are in the form of tax increase and not economies. Yet with the previous EUR11
bn deficit reduction announced a few weeks ago, EUR1 bn was made of cost cutting whilst
EUR10 bn were tax increases. France has always the tendency to increase taxes instead of
reining in it overload civil service (in particular with local authorities which has boomed
for the past 10-15 years).
Markets are taking notice and spreads with Bunds have trebled since early July:
France is next in line (together with Belgium) and is at risk of loosing (should loose) it
AAA rating which is the cornerstone of the EFSF together with Germany’s AAA. Any
downgrade will pressure rates at which the EFSF borrows ; yet, Wednesday, the EFSF had
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to postpone a EUR3 bn bond issue schedule in the next fortnight and 10 yr spread over
German Bunds increased to 1.5% from 0.7% in September.
The current crisis exemplified, if needed to be convinced, that the construction of the EU
and EZ is a Franco-German affair. Whilst Germany is clearly in the driving seat (in the end
who gets the money decides), there still is an appearance of equality between the two
countries: would France loose its AAA, this balance would be shattered and Germany
could, politely, pursue its own interest, eastwards…
Conclusion
France is the hidden weak link of core EZ and this begins to appear openly. I very much
doubt that France will be able to abide by its budget deficit forecast without number
muddling (France can always call on the CDC – a large French state-owned financial
institution- to get a couple of billions euros).
After this crisis, the EZ cannot be the same: the way it works, decisions taken, budgets
voted, Maastricht criteria respected (or even more stringent ones: no budget deficit),
money spent, will make the EZ, if it survives, a different planet. Even its perimeter can be
challenged. I still believe that a narrower EZ with a euro DM is a possible outcome: the
question is, would France be part of it?
Anyway, Europe will be German or will not be.
Source:
Bloomberg: Europe’s Financial Crisis Deepens as Greek Government Teeters
http://www.bloomberg.com/news/2011-11-03/europe-s-financial-crisis-dominates-g-20-
talks-as-greek-government-teeters.html
Bloomberg: Berlusconi Arrives at G-20 ‘Empty-Handed’ After Vowing Economic Overhaul
http://www.bloomberg.com/news/2011-11-03/berlusconi-arrives-at-g-20-empty-handed-
after-vowing-revamp.html
Financial Times: EFSF postpones €3bn bond issue
http://www.ft.com/cms/s/0/47f3998e-0546-11e1-a3d1-
00144feabdc0.html#axzz1cdb7yxNB
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