The Euro drifts along the gloomy waters of confidence, leaking profusely. Spain and Italy, desperately trying to inflate their life jackets, casting worried glances over to the bow, watching the ECB reassure a shivering, wet Greece, shouting for Portugal to fetch more warm towels.
France and Germany argue on the tiller, fighting for control of the rudder. Germany, red in the face, storms away to the starboard rail, fuming. A brief smirk spreads across the face of France, until it looked down over the prow into the ocean, noting the predators gathering below. Banks, the media and Eurosceptics all glaring expectantly.
Is the Euro a sinking ship, and are Euro-zone leaders trying to stop the sea with a bucket? Perhaps. Does that matter currently? Probably not. (Do I want to show off with my nautical knowledge? Maybe.) What matters now are the future implications of the European market bail-out deal passed last week.
A supposedly comprehensive bail-out package was put together on the 27th October by leaders of the Euro-zone to address and tackle the increasingly scary liquidity problems within European markets. However, when looked at in detail, holes appear instantly, and despite markets rallying briefly, Mr.Papandreou’s bombshell of a planned referendum (have to admire the pair on the man), despite being withdrawn still created volatility in the markets. Agreements are in place for Greek debt held by private investors, to be written down by 50%. Good news. The near prison like austerity measures being imposed on Greece as a result will ensure stagnant growth at best, and inflated cuts and shockingly high unemployment at worst. Bad news. A major European market essentially defaulted on part of its debt. Terrible news.
This in itself should be enough to demonstrate the critical situation currently. Often expectations themselves (see future post on Expectations) can act as a catalyst to the feared, undesired outcome. Firms and Banks preemptively withdrawing and relocating their capital from Greek vehicles to more secure Northern European ones, only reduce the liquidity of Greek financial institutions even further.
Higher bond yields are an indication of private investors being unwilling to hold said bonds. Greek bonds have been largely passed on due to private fears that the Greek Government would default. French Bond yields have remained low, showing a willingness from investors to carry French debt, and implying that there is still faith within the French financial infrastructure and monetary policy.
Greek debt has been restructured to make it ever so slightly sustainable in the short run, which only highlights everything that these bailouts ignore, the long run. The problems of internal devaluation aren’t addressed, nor is the 30% competitiveness gap between North Europe and South Europe. Good Luck to Mario Draghi, incoming ECB President. The most important thing currently should be ensuring the liquidity of Spain and Italy who seem to be the next dominoes in line. Special purpose vehicles such as the European Financial Stability facility have been created, though the extent to which they can restore market faith is to be seen. Interesting times ahead for the Eurozone would be an understatement.
NEXT UP: EFSF, CDS, and the PAP.