Collapse of the Global Economy

Greece, Germany Grapple Over Debt

November 16, 2010

Wall Street Journal - Greece's prime minister lashed out Monday at Germany—its chief euro-zone benefactor—for tough talk on government-debt defaults, making clear the widening strains inside the 16-member euro-zone as the currency bloc wrestles with a teeming sovereign-debt crisis.

Addressing reporters in Paris, George Papandreou said the Germans' view—long-held, but recently reiterated—that private bondholders could suffer losses as part of a future bailout was intensifying government-debt woes.

The German position "created a spiral of higher interest rates for countries that seemed to be in a difficult position, such as Ireland or Portugal," Mr. Papandreou said.

He added that the spiral could "break backs" and "force economies toward bankruptcy."

The sharp words reflect the severe difficulties the euro zone faces as it tries to shepherd its weaker members through an unstable period in which their access to borrowing from private markets is sharply curtailed.

Many in Europe—particularly in Germany—are wary of simply replacing that market financing with a blank check from other euro-zone taxpayers, hence the German insistence on finding others to take some of the losses. German leaders also believe that the tough-love approach will, in the long-term, give countries the incentive to live within their means.

"Our task is to anchor a new culture of stability in Europe," German Chancellor Angela Merkel said in prepared remarks for a party congress Monday.

A spokeswoman for Ms. Merkel said Monday the German chancellor's call for investors to bear a share of the burden in case of a euro-zone default in sovereign debt was made in reference to European Union discussions about new strategies for financial-crisis management that would not be implemented before 2013.

At the same time, the very fact that some countries are facing borrowing difficulties is spreading the problem to others and weakening the euro. That makes a speedy solution imperative.

Ireland, the country most acutely in crisis, is facing pressure to accept a bailout in order to stem the contagion, and a Portuguese minister speculated over the weekend that his country—another weak spot—may be forced to leave the euro zone.

In a bit of odd timing, Mr. Papandreou's remarks came as his own country released revised government-finance figures that made it more likely Greece would be unable to get out from under the crush of its own debt pile.

In light of the sovereign debt crisis surrounding the euro, previously outlandish notions of dismantling the euro-zone are gaining a more welcome reception in Germany, a country where many have resented having to bail out Greece. WSJ's Andy Jordan reports.

Greece said Monday it would miss a target to reduce its government deficit to 8.1% of gross domestic product this year, which was set after Greece took a €110 billion (€150 billion) bailout from euro-zone countries and the International Monetary Fund. (Germany put up €22 billion of that total.) As recently as last month, Greece said it would beat its target and report a deficit of 7.8%.

Instead, it now says the deficit is likely to be 9.4% this year, and that government debt would total 144% of GDP at the end of 2010. Citigroup economist Giada Giani said Greece's debt could reach 165% of GDP in 2013. At the time of the bailout, Greece agreed that its 2010 debt would be 133%, rising to 150% in 2013.

A wakeup call for Greece and the euro. WSJ's Andy Jordan and Joe Parkinson report from Athens on the threat of a potentially contagious debt crisis and the moral hazard of bailing out a country with bad fiscal habits.

The bigger debt burden will increase Greece's annual interest tab.

"A significantly higher debt profile inevitably makes the fiscal situation in Greece even more unsustainable than before," Ms. Giani wrote in a research note.

The revisions are in part the fruit of an effort to revamp Greece's poor record of making economic estimates and compiling government statistics. The 2009 deficit—also adjusted Monday from 13.6% of GDP to 15.4%—has been revised a half-dozen times. Greece now says it has finally seen the end of statistical revisions.

But the changes to the numbers also reflect a more fundamental problem: Greece is straining to bring in enough cash to close its budget gap sufficiently. Data from the Greek finance ministry show that revenue is up just 3.7% in the first 10 months of 2010, against the same period a year ago. The deal Greece inked in May as part of its bailout calls for full-year 2010 revenue to be up by 13.7%. That's now all but impossible, and Greek authorities have responded by imposing additional spending cuts to compensate. Analysts say Monday's new figures mean Greece will have to cut again.

Euro Under Siege as Now Portugal Hits Panic Button

November 15, 2010

The Daily Telegraph - The euro is facing an unprecedented crisis after another country indicated on Monday night that it was at a "high risk" of requiring an international bail-out.

Portugal became the latest European nation to admit it was on the brink of seeking help from Brussels after Ireland confirmed it had begun preliminary talks over its debt problems.

Greece also disclosed that its economic problems are even worse than previously thought.

Angela Merkel, the German Chancellor, raised the spectre of the euro collapsing as she warned:

"If the euro fails, then Europe fails."

European finance ministers will meet in Brussels on Tuesday to begin discussions over a new European stability plan that is expected to result in billions of pounds being offered to Ireland, Portugal and possibly even Spain.

David Cameron said he was thankful that Britain had not joined the euro, but indicated his displeasure that taxpayers in this country face a pounds 7?billion liability in any bail-out package.

The veteran Conservative MP Peter Tapsell warned that the "potential knock-on effect" of the Irish crisis "could pose as great a threat to the world economy as did Lehman Brothers, AIG and Goldman Sachs in September 2008."

Ireland has resisted growing international pressure to accept EU financial assistance amid concerns that this would lead to a surrender of political and economic sovereignty.

However, the German government is expected to signal that Ireland may have to accept a pounds 77?billion bail-out, along with a loss of economic and political independence, as the price of preserving the euro.

Mrs Merkel said that the single currency was "the glue that holds Europe together."

Her words came as fellow eurozone members Portugal and Spain rounded on Ireland. They fear that international concerns over the euro will lead to so-called market contagion spreading to them.

Fernando Teixeira dos Santos, the Portuguese finance minister, said:

"There is a risk of contagion. The risk is high because we are not facing only a national problem. It is the problems of Greece, Portugal and Ireland. This has to do with the eurozone and the stability of the eurozone, and that is why contagion in this framework is more likely."

Mr Teixeira dos Santos added:

"I would not want to lecture the Irish government on that. I want to believe they will decide to do what is most appropriate together for Ireland and the euro. I want to believe they have the vision to take the right decision."

He later sought to clarify his comments, insisting that Portugal was not preparing to seek assistance.

Greece had earlier added to the growing uncertainty when it said it would breach the conditions for the bail-out it was granted by the EU earlier in the year. The Greek government said its debt problem was far worse than previous dire forecasts.

Eurostat, the EU statistics agency, said Greece's 2009 budget deficit reached 15.4 per cent of gross domestic product, significantly above its previous figure of 13.6 per cent.

George Papandreou, the Greek Prime Minister, said new European-wide taxes may now be needed to fund bail-outs.

"We need a mechanism which can be funded through different forms and different ways," he said. "My proposal is that taxes such as a financial tax or carbon dioxide taxes could be important revenues and resources for funding such a mechanism."

Irish ministers continued to insist publicly on Monday that they did not require a European bail-out to help meet the cost of repaying the country's debts. However, reports suggested that it may require help to shore up its banks.

Jean-Claude Juncker, the head of the Eurogroup of finance ministers, said the eurozone was indeed ready to act "as soon as possible" if Ireland sought financial assistance. But he stressed that "Ireland has not put forward their request."

Ireland suffered the worst recession of any major economy and has amassed government debts of more than euros 100?billion (pounds 84?billion). It has an unemployment rate almost twice as high as Britain at 13.2 per cent and has a record deficit equivalent to 32 per cent of its gross domestic product.

Senior figures at the European Central Bank lined up on Monday to insist that the Irish accept international help to reassure investors that the euro was secure.

Miguel Angel Fernandez Ordonez, the Bank of Spain governor and a member of the ECB's governing council, said:

"The situation in the markets has been negative due in some part to the lack of a decision by Ireland. It's not up to me to make a decision. Ireland should take the decision at the right moment."

Ireland Told: Take EU Bailout or Trigger Crisis

Dublin warned it has 24 hours to make decision as EU emergency talks loom amid fears Irish banks' contagion may spread to other eurozone countries

November 15, 2010

Guardian - An increasingly isolated Irish government was coming under mounting pressure tonight to seek an EU or International Monetary Fund bailout within 24 hours amid fears that contagion from its crippled banking sector might spread through the weaker eurozone countries.

Portugal, Spain, the European central bank and opposition parties urged Brian Cowen's coalition government to remove the threat of a second crisis in six months by putting a firewall between Ireland and its 15 partners in the single currency.

With finance ministers from the eurozone due to hold emergency talks tomorrow night, financial markets were expecting Dublin to finalise negotiations with the EU over the terms of a deal to allow Ireland to rescue banks laid low by the collapse of the country's construction boom.

"The Irish problem is spreading, but it could get more volatile," said Ashok Shah, chief investment officer at London Capital, a fund management firm. "They have to get this bailout, they have a period of time before it gets impossible, before nasty things happen. The longer they leave it, the more difficult it will get."

Portugal has seen its borrowing costs rocket along with Ireland's as speculation has grown that it too may have to consider a bailout. Its finance minister, Fernando Teixeira dos Santos, told the Wall Street Journal his country had been hit by a contagion effect caused by fears about Ireland's ability to pay its debts.

"I would not want to lecture the Irish government on that," he said. "I want to believe they will decide to do what is most appropriate for Ireland and the euro. I want to believe they have the vision to take the right decision."

The Bank of Spain governor, Miguel Ángel Fernández Ordóñez, a member of the European Central Bank's governing council, told a banking conference in Madrid he expected an "appropriate reaction" by Ireland to calm the markets. He later told reporters:

"The situation in the markets has been negative due in some part to the lack of a decision by Ireland. It's not up to me to make a decision on Ireland, it's Ireland that should take the decision at the right moment."

Ewald Nowotny, another ECB governing council member, said in a radio interview the EU wanted a "quick, good solution to Ireland, so that there will be no spillover" to other heavily indebted countries such as Portugal and Spain.

Weekend reports that Ireland was holding bailout talks with the EU helped ease pressure on Irish borrowing costs today, with the yield on benchmark 10-year Irish bonds easing to 8.1% from a peak of over 9% last week. The premium that investors demand to hold Irish 10-year bonds over benchmark German bunds (known as the spread) also fell to 545 basis points, down from a record 652 basis points last Thursday.

Analysts warned, however, that the selling would quickly resume if Ireland tried to go it alone.

"The expectation of a bailout for Ireland helped its spreads to recover from last week's capitulation," said Gavan Nolan, a credit analyst at Markit. "It's good to talk."

Despite Ireland's insistence that it doesn't need to be rescued, investors say the country needs support, given the fragility of its moribund banking system, and the high borrowing costs limiting the capacity of companies to raise funds.

Ireland's Europe minister, Dick Roche, said rumours that it was on the verge of seeking a bailout could be "very, very dangerous."

He conceded:

"There is continuous talk going on backwards and forwards about the level of our debt but the suggestion that that constitutes going to the IMF or the bailout is just irresponsible."

Ireland's opposition finance spokesman, Michael Noonan, said he believed European intervention was "under way" and matters would come to a head within 24 hours.

The government, he said, was "fighting a rearguard action for appearances purposes."

Noonan said a bailout could lead to Ireland being suspended from the bond markets for three or four years.