Greek economic crisis highlights EU divisions

Greece’s economic crisis highlighted that growing divisions at the highest levels in Europe over the rights and wrongs of a risky Greek debt re-scheduling or wider restructuring involving the banks. Markets fear that any debt restructuring – which the ratings agencies have said they will treat as an outright default – will increase the pressure on Italy and Spain, the euro zone’s third and fourth-largest economies, just one year after a 110-billion-euro Greek bailout was supposed to stop the rot.
The backdrop is not promising – the economic recovery is slowing, rating agencies have downgraded Greece and warned on Italy, Spain’s government is struggling to impose its austerity programmes and the financial markets are more than nervous. The European Union and International Monetary Fund bailed out Greece, then Ireland and Portugal in the hope of stabilising the eurozone’s strained public finances but now Athens’s massive debt problem has come back to the fore.
The head of eurozone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, broke a taboo by invoking the possibility of a “soft” restructuring of Greece’s debt mountain last week. On Tuesday, EU president Herman Van Rompuy warned in a Paris speech of the “real danger” posed by restructuring. He said such a move would only “aggravate the situation,” noting that “the risks of failure in such operations are great when compared to the potential advantages.”
At the same time, he tried to put the emphasis back on the more “difficult but necessary” measures by the Greek government after Athens late Monday announced fresh austerity measures and the immediate launch of a state asset sale to raise funds so that it can reduce its debt burden. The EU and IMF want Greece to sell assets to the tune of 50 billion euros ($70 billion), complaining only recently that Athens had made virtually no progress on this cause. The European Central Bank is strongly opposed to any idea of debt restructuring as a matter or principle as well as practicality – it could lose a great deal if the government bonds it is holding as collateral for funding the Greek banks are suddenly reduced in value.
The ECB’s chief economist last week even warned that a restructuring might force it to reverse its policy that allows Greek banks to borrow ECB funds by putting up Greek sovereign bonds as collateral. EU finance ministers raised the prospect last week that some sort of “voluntary” banking write-down would also be required to accompany any eventual restructuring. The governor of the Bank of France and ECB board member Christian Noyer said Tuesday that the “collapse of the Greek economy, this is the horror scenario” that eurozone and EU partners are desperately trying to avoid.
Giving Greece more time to pay back its debts, seen as a possible first step alongside lowering interest rates, poses very complicated legal questions,” he said. “There is every chance that will amount to a default,” he warned, picking up on the similar stance taken by Fitch Ratings when it slashed Greece’s rating by three notches on Friday.