Another big week for Europe ahead. The Troika is heading back to Athens to finalise its assessment for the next tranche of bailout funds. Normally I would say there is no way that Greece won’t get the money because Europe isn’t ready for the inevitable fall out if they do not. But this is Europe, and self-harm seems to be somewhat of a hobby these days.
Comments from Wolfgang Schaeuble over the weekend point to a different outcome:
Schaeuble again hinted that the deal agreed in July, which envisaged a modest, voluntary “haircut” on Greece’s remaining private creditors, may have to be revised, although he avoided spelling out what many believe, namely, that the country should be declared in default and impose far larger losses on bondholders.
“The problems that the Troika has had allow a certain suspicion to arise that the conditions which we assumed in July may not be given at present,” Schaeuble said.
Schaeuble was at pains to stress that Germany remains committed to safeguarding the stability of the euro zone, but took issue with those who had argued for another huge increase in the funds that the euro zone sets aside for fighting the crisis. Talk at the IMF meeting had included suggestions that the euro zone leverage the EFSF, its chief bailout vehicle, so as to give it more firepower.
Schaeuble pointed out that the EFSF can only work within the legal framework of the EU treaty, and more specifically within the agreement governing the EFSF, neither of which allow it to be leveraged. Deutsche Bundesbank President Jens Weidmann, attending the same briefing, repeated the opinion that he had given to the German parliament earlier this month that leveraging the EFSF, specifically by allowing it to borrow from the European Central Bank, would be equivalent to the monetary financing of state budgets, which is expressly forbidden by the EU treaty.
It is, however, difficult to find context for those statements. The messages coming out from attendees of the IMF meeting have been very confused, and even the final communiqué pledging “a strong and coordinated international response to address the renewed challenges facing the global economy” just sounds like yet another motherhood statement in a long line of them. You can watch the final press conference here if you have 30 minutes to spare, but there really isn’t anything of substance to report on.
The IMF have already stated that they don’t have enough money to to bail out larger eurozone countries if the debt crisis were to spread, which it is doing. The final message that came out of the meeting was that basically Europe is going to have to fix its own problems using the EFSF and the ECB. The Telegraph is reporting that a plan has been formulated which includes a TALF-like solution to do just that, but this plan was previously rejected and as the comments from the Bundesbank show there is still no appetite in Germany to allow this.
It is possible that the Germans have been overruled. I have been thinking about this ever since Jurgen Stark was ejected from the ECB last month. That event showed that the unionists are winning the battle and statements from the ESRB on friday also suggest that this is the case:
If necessary, this could benefit from the possibility for the European Financial Stability Facility to lend to governments in order to recapitalize banks, including in non-program countries,” it said, referring to the euro area’s rescue fund.
The ESRB, which aims to warn of brewing risks in the financial system, was set up in January as part of a new European architecture designed to ward off another financial crisis such as that which followed the collapse of Lehman Brothers Holdings Inc. in 2008. Its board is headed by ECB President Jean-Claude Trichet, with Bank of England Governor Mervyn King as deputy.
“Authorities must act in unison with a total commitment to safeguard financial stability,” the ESRB said in the statement.
So maybe we will see some “surprising” announcement this week.
On Tuesday the Greek Prime Minister George Papandreou visits Berlin for talks with German Chancellor Angela Merkel who will lead her parliament on a vote for EFSF expansion two days later. The vote is sure to create some sabre rattling from all sides of the German parliament, but the vote is expected to pass.
In other news, Malta reminded everyone just how unified Europe is by demanding to be added to the collateral bandwagon on the next Greek bailout payment, the Greek Finance Minister admitted that the country isn’t going to meet its privatization targets, the Bank of France’s Christian Noyer once again claimed that French banks are solid and can face any risk from their exposure to Greek sovereign debt and finally, the Portuguese PM downgraded his country’s growth forecast for next year.