The cancellation of a much-hyped meeting today between European Union finance ministers in Brussels, where it was hoped leaders would finally bang out a clear plan to solve the debt crisis, sent share markets tumbling.
Not that the cancelled meeting is the only issue facing EU leaders struggling to cope with its debt crisis. As The Guardian reports:
“Hopes that summits in Brussels on Wednesday would deliver a “grand bargain” that would finally draw an end to an 18-month sovereign debt crisis were fading fast as talks planned for Wednesday morning were cancelled, rumours surfaced of a collapse in Silvio Berlusconi’s Italian government and the German chancellor, Angela Merkel, adopted a hard line in negotiations with her French counterpart, Nicolas Sarkozy, over the shape of a rescue package.”
The Guardian reported quotes from an unnamed European Union diplomat, who said: “Everybody realises that we are on the brink of such a total catastrophe that anything that prevents it and a huge recession must be grasped. The markets will kill us if they haven’t laughed themselves to death.”
Germany’s Angela Merkel is taking the controversial bailout plan to German parliament to try and gets its support, on the same day she’s to meet with other European leaders. Florian Gathmann and Philipp Wittrock write in Der Spiegel:
“But the notoriously cautious chancellor is running a risk with the vote because a number of parliamentarians from her centre-right coalition will vote against her, just as they did in the initial vote on September 29 to enlarge the EFSF’s lending capacity to €440 billion. She struggled to contain that rebellion and managed to muster the symbolically important absolute majority of all seats in the Bundestag, even though 15 parliamentarians from her governing coalition refused to back her.
The rebellion could be greater this time around, and she faces the same pressure to reach an absolute majority, even though only she technically only needs a simple majority — more “yes” votes than “no” votes.
How united will her ranks be this time? No one knows.”
Britain’s David Cameron is suffering similar issues at home, report Oliver Wright and Nigel Morris in The Independent:
“David Cameron suffered a wounding blow to his authority last night, after he was hit by the biggest rebellion on Europe ever experienced by a Conservative Prime Minister.
More than 80 of his MPs defied a three-line whip to vote against the government over its refusal to allow a referendum on EU withdrawal.
Mr Cameron won a comfortable majority of 372, but it could certainly be described as a pyrrhic victory, as around half of the Tory “non-payroll vote” refused to support the coalition’s official policy position.”
Italian prime minister Silivio Berlusconi is due to face the summit and outline the concrete plan by his government to manage its debt. But his leadership may not even last the week. As Robert O’Daly, economist with The Economist Intelligence Unit, writes in The Guardian:
“At this weekend’s EU summit the pressure on Silvio Berlusconi to stand down as prime minister rose another notch. Italian business leaders have been telling him publicly for months that his government must take swift action tackle Italy’s public debt burden and boost economic growth or he should resign. But Mr Berlusconi is mired in a series of judicial battles and unable to govern his unruly alliance, making passing the necessary legislation almost impossible.”
Meanwhile back in Oz, Prime Minister Julia Gillard warned against a return to protectionist economic policies, at a dinner with Commonwealth leaders. “Australia is willing to play a leading part in the global fight against protectionism,” said Gillard. She said that protectionist policies hurt developing countries but noted that the Doha global free-trade agreement needed new thinking. Instead Gillard suggested breaking up free-trade agreements by sector. “It is time to consider breaking the Doha round into more manageable parts and bringing them to successful conclusion as negotiations are completed,” she said.
Let Greece leave the Eurozone and default – yes, Greece will suffer for it, but it is suffering just the same under these punitive austerity measures. Greece should take a leaf out of Iceland’s book. Iceland refused to bail out the banks and it saved itself from sovereign debt and default. Greece’s departure from the Eurozone will leave certain banks exposed but these banks and the bond holders can take the hair cut – there is not only a moral argument for this but now an economic argument. Why is Europe turning itself inside out to save the rich.
Whilst I have been watching with great interest the impending doom in the Eurozone can someone please explain how “buying up debt” works? It is one aspect of my limited understanding of finance that I dont quite understand. Are we really witnessing the “end of growth” as richard heinburg seems to have articulated quite convincly in his recent book of the same name? After reading this I am now convinced that China is very close to a similar snenario with massive public debt as well!!
Buying Debt
When a country wants to borrow money for any purpose, it issues bonds. A bond is a security that pays a coupon (or payment, usually a % of the face value of the bond) twice yearly over a number of years until a particular maturity date (i.e 1 year, 2 years, 10 years etc). At maturity, they pay the final coupon, plus the principal (or face vale of the bond..usually $1000)
Bonds are not usually risky as the payments are fixed and regular, so banks (and other risk adverse investors) buy them (which has the effect of these investors loaning money to the country). They only become risky when there is a danger that the country will not pay the coupon (or the actual principle at the maturity date). This results in a “default”.
In Greece, due to it’s budget issues, there is a real danger of these bonds not being able to be paid. Hence the price of the bond on the secondary market falls, as no one wants to buy them, and subsequently the yield (which is the coupon/price) increases. Greek 10 bonds have currently got yields of 24% (constrasting with US 10 years at around 2% and Australian 10 years at mid 4’s)
So the European banks are left holding these bonds that may not be worth much at all. As these bonds are assets as far as the bank is concerned, it is a huge drop in valuation for the bank itself and makes it potentially difficult for banks to issue its own loans (or even to repay on-call deposits) to its other customers. The only options are for either for the banks to write off the bonds (not a real option depending on the exposure), or for a government body (central bank or IMF )to buy the bonds from the banks at a discount (say 50% of their value). I believe this is what is trying to be negotiated with the Europeans at the moment (what value to buy the bonds at).
As for the end of growth, I don’t think this is the case. There is no doubt growth will be subdued for a time, but countries will have to try to grow to get out of their current problems. Most governments are in debt and inflation is the best way of getting out of it (debt means you spend now and pay back later, so high inflation will actually decrease your liability in real terms). That is why it is very strange that countries are resorting to austerity measures when they should be trying to stimulate.
@Scott
I think its more complicated than that.
Greek banks lent money recklessly. Their loans were resold to other financial institutions in the EU (that’s why the UK is involved).
The GFC caused a rise in the interest payments on these securities, and a drying up of interbank credit. The economic slowdown meant rising defaults in Greece.
The Greek government effectively nationalised the bank debt, issuing bonds.
Inflation would reduce the effective payment – to Greece – meaning less money to Eurozone financial institutions. This is why the ECB is demanding austerity on Greece, to protect EU financial institutions.
A currency devaluation would have the same effect, because it is _Greek money_ which the debt is denominated in.