New eu­ro­zone crises can be ex­pected in next year

The Pak Banker - - Front Page -

FRANK­FURT: The re­cent eu­ro­zone debt cri­sis, which started in Ire­land, was more per­ilous than the Greek episode ear­lier in 2010. Risks of con­ta­gion and longer-term threats to the euro's sur­vival as a sin­gle cur­rency are much more se­vere than pre­vi­ously thought. The euro is not in im­me­di­ate dan­ger - the emer­gency has mer­ci­fully sub­sided, but new eu­ro­zone crises can be ex­pected in 2011.

While Greece was a clas­sic case of prof­li­gate pub­lic spend­ing and failed at­tempts to hide the true size of fis­cal deficits, the at­tack on Ire­land was due to an overblown bank­ing sec­tor that is still hold­ing on its books too many clearly over­val­ued mort­gages.

When the UK's re­ces­sion was at its worst, the Ir­ish au­thor­i­ties were forced to un­der­write their banks in or­der to pro­tect de­pos­i­tors, ef­fec­tively trans­form­ing bank li­a­bil­i­ties into po­ten­tial sov­er­eign debt. But when Ger­man prime min­is­ter An­gela Merkel re­cently raised doubts about the strength of the guar­an­tees given to eu­ro­zone banks, she in­ad­ver­tently helped un­leash ma­jor spec­u­la­tive attacks on Ir­ish sov­er­eign debt.

Ger­many's idea that pri­vate sec­tor bond­hold­ers must share in losses in­curred by banks is sen­si­ble; there is no rea­son why tax­pay­ers should bear all the losses. But the tim­ing and tone of the Ger­man plan trig­gered wider turmoil and set in mo­tion dan­ger­ous con­ta­gion that en­gulfed other na­tions.

Spec­u­la­tive attacks on Ir­ish sov­er­eign bonds, caus­ing sharp rises in yields, af­fected ini­tially only Por­tu­gal and Greece, small and rel­a­tively weak na­tions in the eu­ro­zone's pe­riph­ery. But debt crises trig­gered by weak banks can­not be con­tained for long. The as­saults spread quickly and per­ilously, en­gulf­ing large economies such as Spain and Italy.

As yield spreads over Ger­man bonds rose to his­toric highs, the mar­kets feared an avalanche. Bel­gium, a coun­try usu­ally seen as a mem­ber of the core, was also at­tacked. When even France, the sec­ond largest and most im­por­tant mem­ber af­ter Ger­many, was af­fected by spec­u­la­tive ru­mours, it be­came clear that the eu­ro­zone is fac­ing se­ri­ous long-term dangers.

The mar­kets' ini­tial re­ac­tion to the bailout pack­age for Ire­land, to­talling €85bn (£72bn), was a brusque re­buff. Calm was only re­stored when the Euro­pean Cen­tral Bank aban­doned its pre­vi­ous mis­guided plan to start with­draw­ing liq­uid­ity sup­port and started in­stead to pur­chase on a big scale sov­er­eign bonds is­sued by pe­riph­ery economies.

The mar­ket mood has now im­proved, but the next at­tack could be much more ag­gres­sive. In 2010, eu­ro­zone gov­ern­ments agreed, af­ter much wran­gling, res­cue pack­ages for Greece and Ire­land. If ab­so­lutely nec­es­sary, they may re­luc­tantly mount a sal­vage op­er­a­tion for Por­tu­gal. -PB News

LA­HORE: Pres­i­dent La­hore Cham­ber of Com­merce Shazad Ai Ma­lik and a head of Aus­tralian del­e­ga­tion sit­ting dur­ing a meet­ing at La­hore Cham­ber of Com­merce and In­dus­try. -On­line

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