Symptomatic of the huge political and financial stakes involved in the Greek debt impasse is the war of words between politicians in Greece and northern Europe.
At such an incredibly sensitive and critical time, a verbal escalation is understandable on the one hand, but also very dangerous on the other. Prior to Wednesday’s Eurogroup conference call, both Finland and the Netherlands were pressing for the next Greek bailout to be postponed until after the next election. Video:
Undoubtedly, yesterday’s conversation would have discussed the escrow account-proposal that has been doing the rounds recently, and the possibility of giving Greece a bridging loan to cover the March bond redemption. In addition, leaders would have talked about how confident they were of the assurances given by various leaders of the major Greek political parties regarding the implementation of fiscal austerity measures.
Some participants would have raised the issue of how damaging (or not) a Greek default would be at this time, especially as there are huge doubts over whether the very expensive debt-restructuring can be approved by the various national parliaments in time. Frankly, it looks very unlikely that the second bailout and the Greek restructuring will go ahead in the near term.
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The timetable is too tight and the political will in the North is fracturing. The fudge option, namely giving Greece a ‘cheap’ but binding bridging loan to get it through this next bond repayment looks increasingly likely. Europe could then delay (again) consideration of further bailout funds and debt restructuring, and/or contemplate more seriously whether it is prepared to cut Greece loose. Needless to say, the acrimony between both sides renders the whole situation even more unstable than before and more frightening for investors. If Greece does tip into default only the naive could claim that the likes of Portugal, Spain and France would not be adversely affected.
Commentary
A deepening hole in Portugal’s labour market. With the economy still in the midst of a terrible recession, it is no surprise that labour market conditions continue to worsen rapidly. In the final quarter of 2011, the unemployment rate jumped to 14.0%, up from 12.4% in Q3, and 11.1% a year earlier. The economy contracted sharply in Q4, by 1.4%, a decline of 2.7% in YoY terms. According to the European Commission, the economy will contract by a further 3% this year. Unfortunately, fiscal austerity comes at a huge price when attempting to rectify both heavily indebted balance sheets and a competitiveness problem simultaneously.
China’s flight from the dollar. Increasingly apparent is China’s preparedness to reduce its exposure to the dollar and the obligations of the US government. In the year to December, foreign exchange reserves in China rose by USD 330bln to USD 3.18trln. Over the same period, Chinese holdings of US treasuries fell by USD 60bln to USD 1.1 trln. China’s political leaders have made clear in the past their concerns regarding the direction of US fiscal policy and the massive financial liabilities being taken on by the US government. For this principal reason China has been keen to diversify out of the dollar over the past decade. Undoubtedly this process of dollar-diversification might have been even more rapid last year was it not for the genuine fears over the longevity of the euro.
US recovery sprouting more seeds. It still feels premature to declare that recovery has arrived in the US, but even so it must be conceded that economic surprises are now becoming common. Arguably the best example is the labour market – in the latest week, initial claims fell another 13K to 348K, a four-year low and down from the peak back in March 2009 of 659K. How times have changed. A lot less people are losing their jobs these days, and moreover there are a greater number finding work as well. Housing construction, which collapsed by an incredible 75% in the three years from early 2006 to early 2009, has turned the corner – housing starts have soared by 35% since February last year. The US consumer is spending, albeit cautiously. For those who look for things to worry about, there is the higher oil price, which is starting to be reflected at the gas pump. All things considered, this better economic cheer is doing President Obama no harm at all.
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