A bit like one of those cartoons where Roadrunner or Wily E Coyote pauses suspended in mid-air for a few seconds before gravity reasserts its dominance, at least for a day or two the world seems to be in pause mode over the eurozone financial crisis before hurtling forward again – over the precipice and to the canyon floor or onward to a rocky but safe landing. By J BROOKS SPECTOR.
On Monday, the American markets seemed to take a breather, while the European Union’s summit was delayed for a week by the president of the European Council, Herman Van Rompuy, ostensibly to give the participating governments more time to figure out just what it is that they want to do next. Van Rompuy said that this meeting, originally scheduled for 17-18 October, will now take place on 23 October, giving the eurozone principals enough time “to finalise our comprehensive strategy on the euro area sovereign debt crisis covering a number of interrelated issues”. Spoken just like a central banker.
This decision follows in the footsteps of what is generally said to have been a positive meeting – but one largely devoid of any real specifics – between German Chancellor Angela Merkel and French President Nicolas Sarkozy. Following their palaver, the leaders of the eurozone’s two biggest economies promised to do something to stop the madness as they agreed European banks needed recapitalisation, but postponed any more details for an announcement towards the end of October.
About this meeting, The Economist commented acidly that “If Angela Merkel and Nicolas Sarkozy had been captaining the Titanic when the iceberg was spotted, they would probably have issued a statement resolving to avoid it. This weekend’s emergency summit saw the leaders of France and Germany pledge to recapitalise European banks, but left the details open (an EU summit on October 23rd will now finalise a ‘comprehensive strategy’). ‘By the end of the month, we will have responded to the crisis issue and to the vision issue,’ was Mr Sarkozy’s epically vague pledge.”
Regardless, even this much seems to have given increasingly nervy investors at least a little bit to cheer about: the euro rose against the dollar and stock markets were up generally after the announcement. But the officials who are responsible for the now-delayed summit were less than euphoric. As one senior EU official said, “They don’t appear to have agreed on anything substantial” and some sources have told journalists that a key area of dispute is how best to recapitalise those European banks.
France apparently favours an enhanced bailout fund because French banks have some serious exposure to sovereign bonds from the PIIGS. But because France has its presidential election in 2012, Sarkozy is resistant to any plan that could risk his country’s AAA credit rating. Germany, on the other hand, appears to favour action by individual nations, at ease it can handle its own banks’ exposure to this sovereign debt. Put another way, Germany is reluctant to add risk – and therefore interest costs – to its own national debt in taking on others’ risk from a larger pool that is the result of the presumed profligacy of other eurozone nations. As economist Laurence Copeland wrote in the Financial Times this week:
“The trouble is that this game gets more dangerous at each stage. In the present case, it is reported that three out of four German voters is opposed to supporting Greece and co., and they’ve not even started paying for it yet. Moreover, it is not as though the largesse is going to create a reservoir of gratitude alongside the Mediterranean – far from it. Judging by reactions in Greece, the outcome will be a legacy of bitterness for decades to come.
“It is important to realise that arguments about the cost of saving the eurozone are ultimately sterile, because under current conditions there is no limit to the commitment that the Germans are being asked to make – a point which is not lost on people in Germany.”
A related question also faces the European Commission. This is whether to propose an increase in the scope of the 440 billion euro bailout fund by allowing it to leverage its financial resources for yet more possible funds. Many experts believe the bailout fund is well short of the amount of money that will eventually, actually be required, once all the support for the flagging economies is tallied up, believing that the fund will ultimately need to be closer to two trillion euros than the currently planned level for it to be effective.
Meanwhile, over in Central Europe, at least initially, has failed to support the enlargement of the financial stability fund when the financial chickens come home to roost. Slovakia – Not France, not Germany, not Italy, not Spain, but tiny Slovakia became the country that – at least initially – has prevented the new and enhanced financial stability fund to come into being. The problem, of course, is that this approval required all of the members of the Euro zone to approve it, not simply a majority.
As the New York Times, reporting on the upcoming vote in Bratislava, explained:
“Malta, with a population of just over 400,000, approved the plan on Monday, leaving Slovakia as the last of the 17 nations that use the euro to take up the accord for formal consideration. The governing coalition in Slovakia on Monday failed to reach a compromise on an endorsement. A vote on the matter in the Slovakian Parliament was scheduled for Tuesday. The failure to reach a deal underlines the extent of political deadlock in Slovakia that could threaten final approval of the expanded 440 billion euro, or $600 billion, bailout fund.”
Once the vote was taken, the Times’ on-the-spot reporting added that with the failure to pass this measure, the four party coalition government of Iveta Radicova appears to have fallen –
“and Europe’s efforts to stem the sovereign debt crisis suffered an embarrassing and potentially costly setback on Tuesday night when Slovakia’s Parliament failed to approve the expansion of the euro rescue fund, a development that brought down the government. With 55 lawmakers voting for the measure, 9 against it and 60 abstaining, the Slovak governing coalition failed to muster the necessary votes to pass the plan that would have required Slovakia to contribute roughly $10 billion in debt guarantees. But the country’s leading opposition party said after the government fell that it would be willing to discuss support for the fund, pointing to the eventual approval of the deal. European officials in Brussels were counting on a political solution, but also weighing the possibility of some kind of messy workaround if Slovakia failed to pass the measure.”
As a result, the Euro zone financial stability package may now depend on some grubby infighting in the Slovakian parliament over whether the EU’s poorest nation should help bail out its most desperate. Before the vote, Radicova had said she would link this vote on the financial measure to a no confidence vote – thereby putting her government at risk. Or as Radicova said before the vote, “I have to say that the coalition partners have failed to reach an agreement,” but that “It’s unacceptable for a prime minister to allow the isolation of Slovakia.” After the vote, the head of the opposition Smer Party, Robert Fico, said that Radicova’s “government failed in its responsibility for governing and ruling, and the prime minister bears the blame for this international shame and scandal.” Fico then added said that his party, the largest single block in the Slovak parliament, was now ready to discuss forming a new coalition government now that the prime minister’s party had lost the vote of confidence. But in the meantime, the whole discussion about the stability fund for the Euro zone has been thrown – again – into disarray.
Meanwhile, in still another pause at the lip of the precipice, over in Athens, there were some positive noises – but no final resolution – that the big international lenders were closer to an agreement with the Greek government on the specific terms by which eight billion euros in aid could be released to bolster the flagging Greek government. Without these loans, Greece will almost inevitably default on its sovereign debt in a matter of weeks. Plans agreed to back in July for Greece to make private investors take a hit on any default are also now seen as insufficient, just like the eurozone bailout fund total is seen as too little. In fact, some reports now say Greece may need to make a 50% cut rather than the 21% first proposed.
But here too there was that pause button. The participating European finance officials acknowledged that they needed more time than originally planned to put together a thoroughly coordinated roadmap. Greece’s finance minister, Evangelos Venizelos, meanwhile told a parliamentary committee that their discussions with those gimlet-eyed, green eyeshade wearing, sharp-pointed pencil wielders from the European Commission, European Central Bank and International Monetary Fund, had come to a good end, with only “certain technical issues” remaining to be hammered out. Venizelos added that he would “personally ensure that conclusive political solutions are found.” Probably until yet another austerity package is wrung out of Greece’s collective hide.
Last week, eurozone finance ministers had delayed their decision on the newest tranche of aid because of a lack of agreement between the three financial institutions and the Greek government. Putting on his best and bravest face, Venizelos said on Monday that he now was expecting improvements in a second bailout package for Greece that would take into account more private sector involvement.
But, just like those Roadrunner cartoons, the action will continue – until the Roadrunner finds a way to cushion the shock of the fall, while Wily E Coyote goes splat at the bottom of the canyon. Nouriel Roubini has become fond of saying that the international financial community cannot indefinitely go on kicking the rescue can down the street while whistling in the dark. Eventually it will end up on the IMF’s desk and by that time it may become too big for any one body to handle it. The real issue, therefore, is – so far at least – the collective failure on the part of European leaders to, well, lead.
Back in 2008-9, it wasn’t pretty, but American political will was just barely sufficient to contain the rot from the sub-prime mortgage debacle in the US, even though some really big names like Bear Stearns and Lehman Brothers ended up in the dustbin of history. Getting the economy to grow and unemployment to contract after this shock, however, has been much, much harder for the Americans – and there has been no consensus of what is to be done on that problem.
However, perhaps we’ll know about that political will thing in Europe by the end of this month. In the meantime, maybe Nobel laureate Christopher Sims’ idea that he’ll keep his prize money in cash for a while yet should give us pause – and keep us wondering about that intangible but very real thing named political courage – and where to find it and how to use it. DM
King Tutankhamun's ceremonial dagger is forged from meteorites.