Market reaction to the second European bailout contrasted sharply with Greek public sentiment as a rejuvenated euro climbed 700 odd points against the dollar in a fortnight while riot police struggled to control the several-month-long uprising across Athens. The $227 billion package will soothe strained credit markets for the moment, besides rescuing the common currency from the brink of collapse. But the deal is contingent on yet more austerity and Greek workers, already burdened with spending cuts, tax increases and increasing unemployment from the $155 billion rescue last year, are refusing to endorse a deal that saves Europe’s lenders at the cost of the common people.
The euro did forego some of the gains against the greenback towards the end of the week, although temporarily, reflecting a sobering of sentiment among pundits studying the deal’s finer details. After months of infighting, the more solvent European governments will finally back banks willing to voluntarily contribute to debt restructuring for Greece, promising them 69 cents on the dollar. Not only is this infinitely better than their 20-odd cent share if Greece defaulted, but also a virtual free pass considering their criminal ‘irrational exuberance’ and loose risk management that lie at the heart of the collapse.
The market rates the present arrangement as a ‘selective default’, meaning creditors will roll over the old, bad loans into new ones at a 3.5 per cent interest rate, with much longer maturity of 15 to 30 years, the collateral of course guaranteed by the ECB (read taxpayers). Meanwhile the European Financial Stability Fund (EFSF), Europe’s IMF, will not only forward new loans, but also pre-empt future crises by buying government bonds and recapitalising European banks.
So much for the coordinated policy response featuring an unprecedented European show of unity that immediately surprised markets to the upside. Yet the euro-dollar uptrend no longer provides the right litmus test for the proposal’s success. Even as the euro shrugged off selling pressure before the weekend, its rise and fall now owe much to America’s own debt problems, meaning euro spikes don’t necessarily reflect its own strength as much as the dollar’s weakness. Also, Greece’s current debt of $500 billion will test the fund’s capacity, the lower interest rate regime will only reduce the debt by a mere eight per cent ($38 billion), and there is no mention of how the Franco-German alliance will address mounting concerns in Italy, Spain and France.
In fact, contrarian traders had already factored in a brief euro surge before the political reality of the bailout set in. While Greece’s debt remains in excess of 150 per cent of GDP despite Europe’s best attempts, all the deal achieves is funneling the additional liquidity through its economy before directing it to big banks holding the bad debt. In effect, while Greeks are subjected to back-breaking austerity, banks get to exchange their bad holdings for fresh bonds guaranteed by Europe’s taxpayers.
What protests across Greece imply, and the market seems missing for the moment, is that austerity is already retarding growth. With wage cuts and rising unemployment, consumer spending has taken an obvious hit, as has investment, meaning much reduced output and national income. When these conditions automatically prompt Greece to borrow yet more, perhaps the market will realise the futility of the package that commits billions from taxpayers across the continent to prop up hemorrhaging banks.
Going forward, the situation will become remarkably more tense since not only will workers in other debt ridden countries rule out similar austerity – as uprisings in different parts of the continent signify – but the bigger economies have problems of their own. France’s runaway deficit is a disaster waiting to happen (as noted in this space earlier) while Germany’s own debt is already more than 83 per cent of GDP, meaning it can barely recapitalise its own banks, much less protect reckless institutions that inflated the periphery.
Still, for now the EU narrative is one of putting interests of giant financial institutions ahead of working classes of countries bordering on default. Yet as Greek demonstrations question the logic of unelected European bureaucrats reducing their democratic rights, the debate is set to assume a distinct political nature. For one thing, it must feature options other than taxpayer austerity to correct banking negligence. Since private debt is becoming public, won’t it make more sense to nationalise the banking sector and raise taxes on rich individuals and corporations to bolster banks, making way for the inevitable breaking off from the euro and steady devaluation to reduce the debt burden and increase exports. Till such will is found, Greece will suffer what much of Europe can look forward to, aptly described by Financial Times columnist Gideon Rachman as “blood, sweat and tear gas”.
The writer is Business Editor, Pakistan Today
