I looks to me that September is going to be “crunch month” for Europe, obviously I could be wrong and this show could go on for another year, but recent events seem to suggest that we are approaching some sort of “do or die” moment.
Over the weekend the Greek Finance minister was fire-fighting rumours that the Troika had left Greece prematurely on Friday because of a disagreement over the worsening state of the economy:
Finance Minister Evangelos Venizelos insisted Sunday there was no rift with EU and IMF auditors, who left Athens complaining that Greece had failed to meet the conditions to unlock more rescue funding.
The departure of the members of the European Union, International Monetary Fund and European Central Bank on Friday was agreed and planned from the outset as a means that would allow us to have a complete picture, not only for the implementation of the 2011 budget, but also for the draft budget of 2012,” Venizelos said in a statement.
His comments were an attempt to set the record straight following reports in the Greek media over the weekend that there was a rift with the European and international auditors over their demand for additional reforms.
The Greek minister stressed that they had left Athens “only for them to return in ten days.”
Senior EU, IMF and ECB officials, known as the ‘troika’ in Greece, arrived in Athens last week to audit the country before giving the green light for the disbursement of the sixth instalment from e 110-billion-euro ($158-billion) bailout loan agreed last year.
Venizelos conceded on Friday that Greece would have to revise its public deficit target for this year, but rejected suggestions of a split.
A statement by the troika’s auditors said that “good progress” had been made on a fresh revamp of Greece’s finances, but that more time was needed to draft a new 2012 budget.
I am not sure exactly how that statement could in any way be true given the the Finance minister also admitted that the Greek economy contract by more than 4.5% this year, worse than an earlier 3.5% forecast, and the deficit has climbed to €15.5bn by July, compared to a target of €16.68bn for the entire year. There is also increasing pressure on the local front for the Greek government with restaurant owners refusing to pay a 10-point VAT rise.
The on-going attempts to sort out Greece and the other periphery nations has again taken its toll on the Angela Merkel’s political career with another loss in a regional election over the weekend:
Chancellor Angela Merkel’s centre-right bloc suffered another stinging defeat Sunday in a regional election in Germany’s poorest state, Mecklenburg-Vorpommern, with both her conservatives and their Free Democrat allies losing support.
With the euro zone crisis looming, Merkel’s Christian Democrats fell to 23.3 percent from 28.8 percent in 2006, according to a TV projection. It was the CDU’s worst-ever showing in the sparsely populated state on the Baltic shore.
A week after France announced that it would have its budget deficit below 3% by 2013 it looks like they have also caved in on the demands to support the acceleration of sanctions against countries that violate the 3% deficit rule of the stability and growth pact. That would obviously effect them if their own budget does not meet their expectations, but it will also be putting additional pressure on Italy who are currently back pedalling themselves out of austerity.
There is also a report circulating from Reuters suggesting that the IMF is correct about European banks. Under the more realistic assumptions of required capital ratios and mark-to-market losses on Greek debt the European banks would need some €19.2bn in new capital to get to a 5% Tier 1, but to get to 8% they need €140bn. The later figure being close to the numbers proposed by the new IMF chief last week when she upset some of the high-ranking Euro-crats by claiming the the European banks needed recapitalising:
Ms Lagarde also looks to be attempting even more policy steerage with he latest interview with speigel.
SPIEGEL: You suggest fighting the effects of a debt crisis with more debt?
Lagarde: That’s not how I see it. In a world that is so economically interwoven, where the actions of industrial countries have direct influence on emerging economies, one can’t be stubborn when the situation changes. We didn’t change our minds about the dangers of too much debt, but over the current state of the world economy.
SPIEGEL: The effects of too much debt can be seen right now in the euro zone, where the European Central Bank had to buy up billions in government bonds. At the end of September, the European rescue fund, the European Financial Stability Fund (EFSF), will take over this task. Does it have enough money to do so?
Lagarde: The EFSF will now be flexible enough. It has been in a bit of a straitjacket. Now it has the option to buy on the secondary market in certain circumstances, to support the banks and provide guarantees. That is very welcome.
SPIEGEL: Europe’s leaders have given EFSF head Klaus Regling a pile of tasks, but not more money. Will the allotted €440 billion be enough?
Lagarde: French President Nicolas Sarkozy and German Chancellor Angela Merkel and other euro leaders have said they will do what it takes. That would include increasing the EFSF if necessary, I suppose.
SPIEGEL: Does that include going as far as supporting Italy? Isn’t the country far too big to be bailed out by other EU countries?
Lagarde: The European leaders have made very strong commitments concerning the euro currency and the euro zone. I think markets should appreciate the strength of those statements and the strength of their political commitment. There has also been a significant improvement in terms of fiscal consolidation and structural reforms in Italy.
SPIEGEL: Critics say that Greece has had enough help and should be kicked out of the euro zone. Do you think that’s a good idea?
Lagarde: Number one, it’s not for me to decide. Number two, I think that all the partners, whether in the European Commission, ECB or IMF or members of the euro zone, are determined to make this work and ensure that the Greek economy regains competitiveness and is properly restructured.
SPIEGEL: There are a growing number of stumbling blocks emerging in the euro zone. Finland has demanded guarantees from Greece before the bailout money flows, inspiring other countries to consider following suit. Doesn’t that put the entire rescue mechanism in doubt?
Lagarde: My understanding is that the euro members are working on this and are working on the pattern that would actually respond to all euro-area members’ expectations. In other words, not a tailor-made program that would fit Finland and nobody else. I am certain the euro-zone members are aware of their responsibilities and will find a solution.
Given the last couple of months I think that is a very optimistic view. But Lagarde is the head of the IMF, so maybe when she says “aware of their responsibilities” it comes with some firepower attached.