European governments moved toward a confrontation over a second rescue package for Greece, just as a dimming fiscal outlook in Portugal opened a new front in the debt crisis.
Euro leaders left a Brussels summit late yesterday with no accord over how to plug Greece’s widening budget hole and German Chancellor Angela Merkel voicing frustration with the Athens government’s failure to carry out an economic makeover.
“Greece’s debt sustainability is especially bad,” Merkel told reporters. “You have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap.”
Bargaining with Greece over a debt writedown and its economic management overshadowed efforts to point the way out of the financial crisis. EU chiefs agreed to speed the setup of a full-time 500 billion-euro ($654 billion) rescue fund and signed off on a German-inspired deficit-control treaty.
The summit was the 16th in the two years since the Greek debt emergency provoked a Europe-wide drama, leading to unprecedented aid packages for Greece, Ireland and Portugal and shattering European faith that the common currency was indestructible.
After the gathering of European leaders, EU President Herman Van Rompuy convened a smaller group, including Greek Prime Minister Lucas Papademos and European Central Bank Executive Board member Joerg Asmussen, to weigh the next steps on Greece.
Van Rompuy spoke of the need “to put the current program back on track” and said finance ministers will try to hammer out the follow-up plan -- in the works since July -- by the end of the week. Greece is counting on aid to meet a 14.5 billion- euro bond payment on March 20 to escape default.
Merkel’s comments indicated that governments are loath to boost an October offer of 130 billion euros of loans in a second package, forcing investors to absorb net-present-value losses on Greek bonds that go beyond the 69 percent now on the table.
Speaking to reporters at 1:30 a.m. today, Papademos said “some difficulties” beset the debt-swap talks and hinted that donor governments may have to put up more money.
“The timeline is tight, but we are absolutely focused on the target of bringing the negotiations to a successful conclusion by the end of the week,” Papademos said.
In turn, Greece’s feuding political parties face pressure to deliver more savings and to verify in writing that the austerity program will be carried out, no matter who wins elections to replace Papademos’s interim Cabinet.
Germany’s proposal for an EU-appointed overseer of Greece’s budget prompted consternation in Athens and led to a rejection by other European governments that warned against stigmatizing Greece.
“Greece is a sovereign nation and must enact the promises it’s made,” said French President Nicolas Sarkozy. “Surveillance of Greece’s progress is normal, but there was never any question of putting Greece under guardianship.”
Investors were seized by fresh doubts about the economic health of Portugal. Concern that the EU would break a promise not to restructure Portugal’s debt pushed 10-year yields up by 2.17 percentage points to 17.39 percent yesterday as two-year yields surged to 21 percent, both euro-era records.
Portugal’s debt has been judged “perfectly sustainable” by the EU and International Monetary Fund, Prime Minister Pedro Passos Coelho said. Asked if there is a risk of writedowns on Portuguese bonds, he said: “No, there is not.”
The Greek standoff and Portugal’s tottering market punctured the start-of-year crisis respite that had been nourished by 489 billion euros in three-year loans infused by the ECB into the banking system.
ECB loans enabled most bond markets to withstand the impact of credit rating downgrades by Standard & Poor’s. Ten-year yields in Italy, with debt estimated at 120.5 percent of gross domestic product in 2011, last week dipped below 6 percent for the first time since Dec. 6.
While Italian yields went back up to 6.09 percent yesterday, the government stockpiled cash for the year’s biggest bond redemption by selling 7.5 billion euros of debt, close to its maximum target.
Leaders completed the fiscal-discipline treaty, which speeds sanctions on high-deficit states and requires euro countries to anchor balanced-budget rules in national law. Eight countries outside the euro backed the pact, which was shunned by Britain and the Czech Republic.
One potential hiccup emerged when Sarkozy said that ratification in France will likely be delayed until after elections in April and May that polls show he will lose.
The front-runner, Socialist Francois Hollande, has vowed to renegotiate the treaty, saying it is biased toward austerity and would put an additional squeeze on the economy.
With an eye toward Ireland, Germany pushed through provisions that only countries ratifying the fiscal compact will be eligible for aid from the permanent bailout fund, the European Stability Mechanism, now set to go into operation on July 1, a year ahead of schedule.
The permanent fund requires governments to put collective action clauses into new bond issues as of January 2013, five months later than previously planned. The clauses are common in U.S. and U.K. law, enabling a debt restructuring to go ahead by a vote of a supermajority of bondholders, denying a veto right to solitary investors.
“Collective action clauses shall be included, as of 1 January 2013, in all new euro area government securities, with maturity above one year, in a way which ensures that their legal impact is identical,” according to a final text of the statutes obtained by Bloomberg News.
While the clauses would leave the door open for future restructurings, the fund’s statutes deem write-offs “exceptional” and subject to IMF standards, the text says. It tones down language on “private sector involvement” -- code for forcing bondholders to take losses on governments that fall too deeply into debt.
Leaders sidestepped mounting pressure to raise the ceiling on rescue lending from 500 billion euros once the permanent fund goes on line, sticking with plans to handle that question at the next summit on March 1-2.
Luxembourg Prime Minister Jean-Claude Juncker, Europe’s longest-serving leader and the head of the panel of euro finance ministers, summed up two years of crisis-fighting: “If I wasn’t optimistic you could have reported about my suicide months ago.”
I know exactly how Juncker feels and while I understand Germany's frustration with Greece, and the response from Athens, I agree with what Yannis Varoufakis wrote in his latest comment, it's all pointless fury:
So, some German politicians put on paper that which they have been thinking of a while: Greece has become an unbearable burden and, if they are to resign themselves to continue putting their money in that particular black hole, they might as well have a say in the way it is managed on the ground. Predictably, the leaking of this document gave Greek politicians, and the hapless Finance Minister in particular, a great opportunity to flex muscles, to recite their fury regarding Germany’s trampling on Greece’s national sovereignty, etc.
Poppycock, I say! On both sides. On the Greek side, what on earth did we expect? Once a country accepts the logic of massive loans on condition of austerity that deepen the country’s insolvency, thus demanding more loans, the moment will come when the international lenders will insist upon direct executive powers. In corporate language, this is known as receivership. Greek politicians that put their signatures on the dotted line of the various ‘bailout’ agreements are stretching credulity when protesting the loss of national sovereignty. The horses bolted months ago.
As for the German politicians, I am afraid that the judgment of history will not be kinder. They willfully piled gigantic new loans on an insolvent nation, on condition of austerity that shrinks the national income from which these loans (plus the preexisting ones) would have to be paid. And then, when Greece’s social economy shrivelled and died, they became incensed that the ‘reforms’ did not work, that the tax revenues shrank, that there are no buyers for the Greek state’s assets. My message to them is: you imposed an erroneous policy on Greece, and the rest of Europe’s periphery, and now you must bear the consequences.
For months now, through the pages of this blog (and elsewhere), I have been arguing that the tragedy of the Greek ‘bailouts’, indeed of the overall strategy for dealing with the euro crisis, has been a comedy of errors. Is it not time that our politicians (Greek and German) owned up to their serial idiocy? Has the time not come to stop the blaming game and the posturing?
On a final note, I have a message for Germany’s politicians: As a private Greek citizen, I understand your fatigue with all things Greek. But if you are so sure that your blueprint for stabilising Greece is so good (and that the problem is its implementation by the Greek authorities), I would welcome you to come to Athens to take over its implementation. But on one condition:
If you succeed in making austerity work in the middle of a debt-deflationary cycle, I am happy for you to name your price. E.g. if within a year or so Greek GDP starts growing again and unemployment diminishes to below 10%, you can have our electricity grid (that Siemens has always coveted), our water companies, any assets that you name in advance. But, if you fail, then you must pay a price: e.g. pay in full Greece’s outstanding loans to the troika.
So, how about it? Are you game?
As a Greek-Canadian who knows Greece and Greeks all too well, I think Germany needs to take a step back here. Importantly, Germany cannot change 60 years of corruption, public sector bureaucracy and huge tax evasion in 60 days by ramming more austerity down the throats of Greeks, most of whom had nothing to do with this crisis. It will backfire in a spectacular fashion.
Yes, we all know Greece hasn't done enough in terms of structural reforms. They have way too many public sector workers with way too much power, all threatening the government that if they go though with troika's demands, it will cost them the elections. That's the reality in Greece.
What else? Tax evasion is endemic and happens at all levels of Greek society. Business people, doctors, lawyers, accountants, pharmacists, and tax collectors -- the worst offenders -- are among the people found guilty of tax evasion. These tax evaders are getting away with murder. So are many others that are not part of this official list.
Publishing a list of shame is stupid! Go after these people and throw them in jail! And don't forget to go after ex-ministers -- many of whom 'discovered' new fortunes after serving in government.
I can write books on what is ailing the Greek economy but one thing is for sure, hard working Greeks are tired of being made to look like lazy asses by Germany and other Northern European countries who are frustrated by the slow progress of Greek structural reforms.
At the end of the day, you cannot reconcile austerity with growth. Germany has to listen to Soros and get on with a more permanent solution to the European debt crisis. We can have 100 EU summits, but it all boils down to what Soros is advocating, which is why he took Germany to task at the World Economic Forum.
I know many Germans will fight tooth and nail against fiscal union and eurobonds, but such reactions will only ensure a prolonged and nasty debt-deflationary spiral in Europe and likely bring the rest of the global economy down with it. This is something we can ill-afford, especially after the 2008 financial crisis.
Below, Max Keiser debates with another panelist on Press TV on what he thinks about the Greek debacle and who is to blame. Don't agree with everything Max says, but he is colorful, animated, and knows how to cut to the chase to expose the fraud and corruption in our global financial system. [Note to Max: Jamie Dimon is an American of Greek descent.]