Is the euro zone run­ning out of time on debt cri­sis?

The lag was un­der­stand­able be­cause the EU had never had to deal with such a cri­sis since the euro's in­tro­duc­tion in 1999. Once a res­cue mech­a­nism was agreed for Athens, it was only a mat­ter of days be­fore the funds were dis­bursed.

The Pak Banker - - Editorial5 - Luke Baker

THE euro zone debt cri­sis is mov­ing at a such a pace, with pres­sure now mount­ing on sev­eral coun­tries si­mul­ta­ne­ously, that Euro­pean Union in­sti­tu­tions may find it im­pos­si­ble to get ahead of the mar­kets.

Af­ter Greece's deficit and debt prob­lems emerged in late 2009, there were five months of steadily ris­ing Greek sov­er­eign bond yields and ef­forts by EU of­fi­cials to con­tain the threat be­fore a 110 bil­lion eu­ros ($140 bil­lion) bailout was ar­ranged.

The lag was un­der­stand­able be­cause the EU had never had to deal with such a cri­sis since the euro's in­tro­duc­tion in 1999. Once a res­cue mech­a­nism was agreed for Athens, it was only a mat­ter of days be­fore the funds were dis­bursed.

In the case of Ire­land, it took weeks of mar­ket pres­sure driv­ing bond yields higher - with the spread over Ger­man bunds widen­ing - be­fore Ire­land re­quested help, an EU-IMF team was dis­patched, and an 85 bil­lion euro bailout was as­sem­bled.

But now fi­nan­cial mar­ket pres­sure is be­ing brought to bear on Por­tu­gal, Spain, Bel­gium and Italy all at once.

In the­ory the EU has a mech­a­nism in place to try to stave off the pres­sure, and can act within hours via con­fer­ence calls to take de­ci­sions. How­ever, there are doubts about whether it is nim­ble enough to out­wit or get ahead of the mar­kets, and whether there is enough money to douse the spread­ing flames. "When it comes to EU politi­cians and the mar­kets, there is def­i­nitely an asym­me­try of arms," said Hugo Brady, a se­nior pol­icy an­a­lyst at the Cen­tre for Euro­pean Re­form, a think-tank.

"One crit­i­cism has been that po­lit­i­cal lead­ers move in­cre­men­tally, rather than in big steps, for un­der­stand­able rea­sons," he said, point­ing out that politi­cians have vot­ers and other con­stituen­cies to con­sider, which mar­kets do not.

"In my view, the pe­riod of send­ing sig­nals to the mar­kets and see­ing how they re­act has to end. It's not a game the politi­cians are win­ning." The 16 euro zone coun­tries have, in the­ory, 750 bil­lion eu­ros at their dis­posal to com­bat the cri­sis. Of the to­tal, 250 bil­lion comes from the IMF, 440 bil­lion from euro zone gov­ern­ments and 60 bil­lion from the 27coun­try EU.

So far, only about 60 bil­lion has been dis­bursed - in Dublin's pack­age about 25 bil­lion came from its own cof­fers and bi­lat­eral loans. Greece's bailout was a sep­a­rate agree­ment.

With at least 650 bil­lion eu­ros still avail­able, euro zone coun­tries should be able to han­dle a bailout of Por­tu­gal and pos­si­bly even Spain, if Lis­bon and Madrid request aid. In such an even­tu­al­ity, tech­ni­cal teams could be dis­patched within days and money could be re­leased around a week to 10 days later.

In the scheme of sov­er­eign bailouts, that is light­ning quick, and when it comes to the Euro­pean Union, the in­sti­tu­tional wheels can sel­dom have moved so quickly. But pan­icked in­vestors, or spec­u­la­tors bet­ting that Por­tu­gal, Spain and oth­ers may be forced to ac­cept bailouts, can take de­ci­sions re­motely and move bil­lions of eu­ros in sec­onds, ap­ply­ing al­most in­stan­ta­neous pres­sure.

For those in fi­nan­cial mar­kets, the sense that the EU does not have a clear and re­li­able take on the sit­u­a­tion - not­with­stand­ing the time and ef­fort of­fi­cials are putting in - is enough to lose faith and de­cide to get out.

"The politi­cians in Europe as a group, and per­haps an or­ches­trated group, keep putting out the mes­sage that ev­ery­thing is fine when it is ob­vi­ously not," said Mark Grant, man­ag­ing di­rec­tor of South­west Se­cu­ri­ties in Florida and the author of the fi­nan­cial com­men­tary "Out of the Box."

"There reaches a point, which ar­rived yes­ter­day in my opin­ion, when the in­vest­ment com­mu­nity's faith was breached one too many times and now peo­ple are flee­ing the scene," he said, point­ing to the fall­ing euro and ris­ing euro zone yields.

The euro zone may now find it­self hav­ing to con­sider rad­i­cal de­ci­sions to move ahead of the cri­sis. On Sun­day, EU fi­nance min­is­ters laid out de­tails of the Euro­pean Sta­bil­ity Mech­a­nism, which will in­volve pri­vate bond­hold­ers shar­ing the cost of any sov­er­eign debt de­fault or re­struc­tur­ing. But it comes into ef­fect only in mid-2013. To han­dle the cur­rent sit­u­a­tion, an­a­lysts are now sug­gest­ing so­lu­tions that in the minds of many EU lead­ers would be un­think­able, such as turn­ing the euro zone into a full fis­cal union, with all risks ef­fec­tively shared out equally.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.