Euroland since May 2010

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IMF and 15 eurozone nations pledge €110bn in financing to Greece over three years
* Includes Belgium, Austria, Portugal, Finland, Ireland, Slovakia, Slovenia, Cyprus, Luxembourg and Malta
€1bn = $1.43bn
Source: IMF; EU Commission; ECB

Contagion remains a risk for Euroland
The Australian
Irwin Stelzer, Wall Street Journal
May 4th, 2010

The future in Euroland is now more or less clear. The International Monetary Fund and Greece's Euroland colleagues will come to the aid of Greece to the tune of a bit more than €100 billion ($143 bn), but it remains more rather than less likely that there will be some sort of restructuring, with creditors probably taking a haircut — a.k.a. a loss — on the order of 30%. German officials are so frightened of a eurozone-wide meltdown, and the possibility of deep losses for its banks, which have lent generously to Greece, that they are prepared to ignore their voters who, by 57 per cent to 33 per cent (10 per cent don't know), oppose aid. In the future, says German Chancellor Angela Merkel, miscreants should be hit with sanctions. The words "moral hazard" apparently were not mentioned.

It is difficult to tell just how effective the Greece bailout will be in stemming the spread of the contagion to other Euroland states. There are too many ifs. Spain's debt-to-GDP ratio is only about half that of Greece, and it might escape further downgrading of its debt if its socialist government can be frightened out of its lethargy. But with president José Luis Rodríguez Zapatero insisting the worst is over, stasis is more likely than action. Italy tapped the bond markets for €6.5bn last week, and found investors relatively eager to buy its IOUs at rates below those on outstanding debt. If it can stick with the spending cuts engineered by finance minister Giulio Tremonti, and bring down its deficit, running at 5.2% of GDP (Greece's is 13.6%), Italy might avoid a downgrade. Portugal has tightened and accelerated its austerity program, and might avoid a further downgrade if it follows through. Ireland's economic stabilization program and recapitalization of its banks are deemed to be working, and if the Irish continue to remain on their couches and in their pubs rather than take to the streets, the flow of red ink might abate before the nation's debt level becomes unmanageable. If British voters put a deficit-cutting government in place on Thursday, the nation might avoid losing its triple-A rating.

Even if all of these ifs come to pass, the world will not return to any semblance of its pre-crisis condition. The days of national fiscal policy determination are over in Europe. EU President Herman Van Rompuy is calling for the creation of an "economic government" run from Brussels, and European Commission chief José Barroso claims the Lisbon Treaty gives him the power of "economic management." National sovereignty takes another hit, courtesy of the Greece crisis and the ever-ready Eurocracy.

Also changed forever is the standard by which sovereign debt will be judged. The rating agencies are under pressure to be less generous in rating debt instruments, and not only those issued by Euroland governments. In the US, these agencies gave their coveted triple-A rating to the securities that Goldman Sachs is accused of unethically, fraudulently or perhaps even illegally, flogging to knowledgeable investors. In Europe, the agencies are accused of delaying too long in reconsidering their ratings of the bonds of Euroland's periphery countries, and ignoring the effect on sounder economies of their link to shakier ones.

The rating agencies now know the Greek bailout means Euro-area nations are indeed their brothers' keepers, which in practice means every country's debt is on every other country's balance sheet. Germany and France can no longer argue the relevant fact is that their own finances are sound, now that they are assuming responsibility for the debts of Greece and other countries, and will have to bail out their own banks if loans made to Greek, Portugal, Spain and perhaps others are not repaid in full. British voters, their nation brought to its knees by excessive government spending, might temper their harsh judgment of Gordon Brown by recalling that as chancellor he prevented Tony Blair and Peter Mandelson from consigning sterling to the fate of the deutschmark by adopting the euro.

The more skinflinty rating agencies will also have to take into account the condition of private sector institutions or government agencies that might look to the central government if trouble strikes. A troubled bank that can turn to the government should have its woes reflected on that government's balance sheet, as should US states that the federal government will not allow to go broke. In the private sector, the days when off-balance-sheet financial obligations were ignored when rating a security are over, or almost so.

With this new, consolidated approach to appraising credit-worthiness, and greater transparency, comes greater knowledge of risks investors face, and with greater knowledge will come a demand for higher interest rates.

Extract: Ireland demurs as EU pushes $136bn bailout
The Australian
Marcus Walker, Patrick McGroarty, Charles Forelle, Wall Street Journal
Nov 18th, 2010

BRUSSELS—Senior European officials have laid the groundwork for a bailout of Ireland that could reach €100 billion ($136 bn) and said experts would travel this week to Dublin to examine the country's finances amid alarm about the dire straits of the Irish banking system. Several eurozone countries urged Ireland to adopt an aid package, according to people familiar with the matter, and some pressed for the package to include direct loans from Britain alongside assistance from Europe and the International Monetary Fund. Britain is in the European Union but not the euro zone. But at a finance ministers' meeting in Brussels, Ireland's Brian Lenihan repeated that his country was not ready to seek help despite a huge budget deficit and sky-high interest rates on its government debt. He said "urgent talks" were necessary to calm "serious market disturbances" that "jeopardize not only Ireland, they threaten the euro zone."

Irish banks made disastrous property loans during a decade-long boom, and have suffered catastrophic losses in the bust. Ireland has said it will pump €50 bn into its banks, and it is spending billions to buy bad assets.

Markets fear Ireland's problems could spread the financial crisis into vulnerable members of the euro zone such as Portugal and Spain. Contagion of Spain, one of the continent's largest economies, would greatly strain Europe's rescue capacity and pose a severe threat to the euro's survival. EU President Herman Van Rompuy on Tuesday cast the Irish crisis as a decisive moment for Europe and its common currency. "We all have to work together in order to survive with the euro zone, because if we don't survive with the euro zone, we will not survive with the European Union," he said. European stock markets tumbled Tuesday amid the concerns over Ireland, with the steepest declines coming toward the end of the trading session. London's FTSE 100 index recorded its sharpest one-day point decline since late June, falling 2.4%, while in France and Germany the stock indexes fell 2.6% and 1.9% respectively. The commotion in Europe was one factor tugging down stocks in the US, where the Dow Jones Industrial Average dropped 1.6%.

In Ireland, political leaders who insist they don't need a bailout are also angling to avoid the stigma of an IMF-directed economic program, if one comes. IMF loans typically come with policy prescriptions and force governments to relinquish a degree of sovereignty to the Washington-based institution. The EU cannot provide help unless Ireland asks for it, and negotiations looked set to continue into a second day of meetings Wednesday. Among the sticking points: Ireland is reluctant to surrender its own economic planning to the IMF, while several countries are making strict IMF oversight a condition of their help. Finnish government officials made it clear that they felt Ireland would have to submit to IMF oversight to better ensure repayment of any loan. Arriving at the meeting in Brussels, the Dutch finance minister drew a line in the sand. "The IMF should be involved, otherwise we will not give any support," Jan Kees de Jager said.

In Ireland's parliament Tuesday, Prime Minister Brian Cowen repeated that the country had "not applied to any facility," but that "some people" would like it to apply for aid. "We are prepared to work with our counterparts in the euro area to see in what way we can normalize market conditions," he said.

Unrest rocks Europe as debt crisis explodes
The Australian
Nov 26th, 2010

ANGER and fear about a seemingly unstoppable debt crisis coursed through Europe yesterday. Striking workers shut down much of Portugal, Ireland proposed its deepest budget cuts in history and Italian and British students clashed with police over education cuts. Analysts warned that even the desperate efforts of governments, the EU and the International Monetary Fund might not be enough to prevent countries defaulting or banks going under.

The Irish Stock Exchange saw a bloodbath in bank stocks as investors pushed the panic button, and bond traders were betting it would be only a matter of time before Portugal and possibly Spain begged for outside help. In the Portuguese capital, strikers all but closed Lisbon airport. "People have to fight for their rights," said commuter Luis Moreira, 51, referring to salary and pension cuts. Government policies had "sent people into poverty and misery", said union leader Manuel Carvalho da Silva, noting that Portuguese civil servants would see average wage cuts of 5 per cent next year.

In Italy, students occupied university buildings and piazzas to denounce proposed education cuts, clashing briefly with police in Rome and blocking five main bridges over the River Arno in Pisa. In Britain, students decried government plans to triple tuition fees. "Education is not a rich kid's game," said Tash Holway, a 19-year-old student in London. "If this keeps up, the entire industry will change. It won't be about talent, but only about who can pay."

The Irish Prime Minister, Brian Cowen, announced yesterday he expected the EU-IMF bailout loan to total E85 billion ($115.6b). Some experts accused Ireland of minimising the true scale of its financial disaster, saying it probably needed a bailout of E130bn because of looming defaults on residential mortgages. "The government is completely in denial about the amount of money they'll have to borrow," said Constantin Gurdgiev, a finance lecturer at Trinity College, Dublin.

Analysts have estimated Portugal will need at least E50bn, but a bailout for Spain could be exponentially costlier. Outside help for Spain - the euro zone's fourth-largest economy - could even mean the end of the euro zone itself, with either Spain forced out or Germany jumping ship back to its own deutschmark.

Leaders agree on new EU crisis fund
Weekend Australian
Marcus Walker and Charles Forelle, The Wall Street Journal, AFP
Dec 18th, 2010

BRUSSELS: European leaders have endorsed plans for a new fund to rescue indebted eurozone countries and have proposed treaty changes to make that possible. However, they have yet to resolve disagreements over whether more radical action is needed to quell a debt crisis. Meeting in Brussels yesterday for the final 2010 summit, EU leaders agreed to replace the region's emergency rescue fund, which ends in 2013, with a permanent crisis finance program. But the crisis gripping the weaker governments of the euro zone shows no signs of abating. On Thursday, Spain was forced to offer significantly higher interest rates at a debt auction than it paid just a month ago. Earlier on Thursday, the head of the International Monetary Fund said he feared European officials were "too much behind the curve" risking further contagion in the euro area. "The risk is always to act only at the last minute," IMF Managing Director Dominique Strauss-Kahn said.

Also Thursday, the European Central Bank said it would all but double its capital base — a signal that its loans to banks and its purchases of government bonds of weak economies carry a risk. Finance ministers said last month that the new fund would be broadly in line with the EU's current temporary €750 billion ($US1 trillion) fund. New loans and guarantees would only be made available if judged "indispensable" by peers, and, as with Greece or Ireland, in exchange for painful cuts and other changes, the EU stressed. That tweak came at Germany's insistence, although Europe's paymaster made no progress in a similar push for future bailouts to need unanimous backing — which many oppose as it would grant Berlin an absolute veto.

The continent's inability so far to halt the spread of the turmoil bodes ill for the coming year, when EU countries are expected to need to raise $US2 trillion of debt. If they fail to put their bickering aside, they risk triggering the unthinkable: the implosion of the euro. Supporters of European integration want assurance that Europe will do whatever it takes to defend the euro. A failure of the currency could presage the collapse of the EU itself, they argue. "If the euro zone pulls apart — and there are people who now say that is thinkable who two years ago said it was unthinkable — the question is what the European Union then is," says Timothy Garton Ash, professor of European studies at Oxford.

The European Central Bank has relieved some of the pressure by purchasing billions of euros of bonds in those countries most exposed to the crisis. Yet ECB President Jean-Claude Trichet insists Europe's governments must devise a more permanent solution. Many think that means only one thing: fiscal union. The flaw in the euro zone's makeup is that the ECB sets monetary policy but each state issues its own debt and EU rules prohibit one country from subsidizing another. Economists have long viewed the euro area's lack of fiscal coordination as its Achilles' heel. Yet for Germany and other countries at the area's economic core, the rules that prevent poorer countries from leaning on healthier ones are sacrosanct.

Europe has so far sought to manage the crisis with stopgap measures. Now, with Greece and Ireland under the virtual stewardship of the EU and the IMF, and Portugal facing a similar fate, there is a growing recognition in Europe that policymakers are running out of options. Spain, a far larger economy than Ireland or Greece, is in jeopardy, partly because of unknown losses in its banking system as its housing bubble deflates. Even Italy and Belgium, long used to managing high public debts, are under pressure in bond markets.

Will worsening market panic force the EU to take dramatic new steps? Will political resistance in Germany to paying for other countries' problems lead to the break-up of the euro? Or will weak countries quit the currency after deciding bone-crushing austerity is too high a price? The treaty changes needed to create the rescue fund now have to pass through 27 national legislatures.

IMF chief Dominique Strauss-Kahn resigns
The Australian
Thursday, May 19th, 2011

DOMINIQUE Strauss-Kahn has resigned as the head of the International Monetary Fund, saying he wants to devote "all his energy" to battle the sexual assault charges he faces in New York. The IMF's executive board released a letter from the French executive today in which he denied the allegations lodged against him but said that with "sadness" he felt he must resign. Mr Strauss-Kahn, 62, said that he was thinking of his family and that he wanted to protect the IMF.

"It is with infinite sadness that I feel compelled today to present to the executive board my resignation from my post of managing director of the IMF," the five-paragraph letter said. "I think at this time first of my wife — whom I love more than anything — of my children, of my family, of my friends. I think also of my colleagues at the Fund. Together we have accomplished such great things over the last three years and more. To all, I want to say that I deny with the greatest possible firmness all of the allegations that have been made against me. I want to protect this institution which I have served with honour and devotion, and especially — especially — I want to devote all my strength, all my time and all my energy to proving my innocence."

Mr Strauss-Kahn, who had faced increasing international pressure to quit, announced his decision hours before a bail hearing that could have spelled the end of his leadership of the IMF anyway. The former French presidential hopeful is being held in a New York jail after being refused bail on Monday on charges of assaulting a maid at a Manhattan hotel. If a judge denies him bail again late tonight (AEST), or imposes highly restrictive conditions on his freedom, the IMF's executive board would have expected him to resign, two senior IMF officials said. If he didn't, the board could have removed him on the grounds that he couldn't lead the IMF from a jail cell or far from its Washington headquarters.

The IMF's statement said the process of choosing a new leader would begin, but in the meantime John Lipsky would remain acting managing director. One of the IMF officials said earlier today that the fund had yet to speak with Mr Strauss-Kahn since his weekend arrest. There were no procedures for suspending or placing its leader on extended leave.

EU divided on restructuring of Greek debt
The Australian
Charles Forelle in Brussels and Brian Blackstone, The Wall Street Journal
Additional Reporting: Sebastian Moffett
Thursday, May 26th, 2011

The dispute between Europe's central bankers and politicians over how to deal with Greece's worsening financial problems intensified, as one of the European Central Bank's top officials rejected calls by Germany and other eurozone states for a restructuring of Greek debt — calling it a "horror scenario." The comments from Bank of France Governor Christian Noyer, a member of the ECB's governing council, mark the latest salvo in an increasingly heated debate that is fueling fears among investors that the region's debt crisis has entered a dangerous new phase.

The standoff, which has pitted Europe's central bank against Germany and several other eurozone governments, cuts to the heart of a question at the center of the region's 18-month crisis: how much are the euro area's wealthier members willing to pay to keep the bloc intact? At issue is whether Greece, barely a year after receiving a €110 billion ($155 billion) bailout, should be forced to default on its obligations or if Europe should extend it more aid. The ECB worries about the consequences even a mild debt restructuring could have on Ireland and other weak eurozone countries, while leaders in the currency bloc's strong economies, mainly Germany, fear the political cost of further bailouts.

Moody's Investors Service on Tuesday also warned about the consequences of restructuring, saying any Greek debt default would likely torpedo the country's credit for a sustained period, possibly thrusting Greek banks into default and leaving other weak euro nations struggling to avoid junk status. The head of France's Société Générale, one of Greece's creditors, echoed the concerns, saying it would be difficult to convince investors that Greece was a one-off. There are consequences for "how the market will look at the European Union and each country," Société Générale Chief Executive Frédéric Oudéa said. "The issue is not really just the Greek issue." The outcome in Greece could hit Ireland, which was forced to seek a bailout last year. Ireland is less indebted than Greece, but its banking system is fragile and fears of debt restructuring could reignite the crisis there.

The conflict within Europe's leadership revolves around a basic question: What to do as Greece, again, runs out of money? There is broad accord in Europe that the €110 billion granted last year isn't enough to get Greece through next year. But there is no agreement on how to plug the gap.

Under intense political pressure, leaders in Europe's stronger economies are deeply reluctant to simply write another cheque. That, many fear, would put the eurozone too far down the road to a fiscal union, in which strong countries have no alternative but to pay for weaker members. Instead, Berlin wants Greece and weak countries to repair their finances through deep spending cuts and debt restructuring.

The ECB's position is that Greece's financing shortfall must be filled by other eurozone countries once Athens has exhausted all options for paring its budget and selling its state assets — not by delaying or reducing payments to creditors. But several key European finance ministers, including Wolfgang Schäuble of Germany and Christine Lagarde of France, have left the door open to a so-called reprofiling of Greece's debt. Under that scenario, Greece's private creditors would be asked to accept repayment later than expected to help Greece cover its fiscal holes in 2012 and 2013. Such a rescheduling would lessen or obviate the need for European governments to pay for a second bailout. At the least, a reprofiling would mean that private-sector creditors feel some pain, along with taxpayers.

Since the debt crisis emerged early last year, nearly all of Europe has maintained that a eurozone debt default of any flavor is unthinkable. National leaders fear a loss of prestige and a hit to confidence in the region. ECB officials fear the continent's fragile banks, unprepared for losses on what they had thought were ultra-safe investments, could collapse.


As Greece's parliament broaches new austerity measures, rioters take to the streets with firebombs and yoghurt
The Australian
Thursday, June 16th, 2011

GREECE's prime minister, struggling to ensure Parliamentary approval for a crucial austerity bill, said he would reshuffle his Cabinet and seek a vote of confidence for his new government this week, after coalition talks with opposition parties failed. George Papandreou's announcement came after hours of negotiations on a day when central Athens was rocked once more by anti-austerity riots and the debt-ridden country came under massive pressure from markets.

"The country is facing critical times," Mr Papandreou said. "Today I made new proposals to the leaders of all parties to achieve the necessary national consensus. I clarified that my responsibility has no dependence on official posts." Opposition party officials had called for Mr Papandreou's resignation as a condition for any coalition deal. "Before the meaningful issues were negotiated, conditions were made public that could not be accepted," Mr Papandreou said, adding that they would have kept "the country in a lingering state of instability and introversion, while the vital national issue remains dealing with the national debt."

The emergency talks began as riot police clashed with thousands of youths in the main square outside Parliament. Police armed with riot shields attempted to hold back the crowd, which was reportedly hurling open containers of yoghurt. Police fired repeated volleys of tear gas to repel rioters hurling firebombs and ripped-up paving stones. A crowd of youths smashed the windows of a luxury hotel in the square. More than 60 people were injured, including 36 police.

Mr Papandreou has been struggling against falling approval ratings and an internal party revolt among the governing Socialists over a new package of austerity measures. He saw his majority in the 300-seat Parliament reduced to five on Tuesday after one of his deputies rebelled and declared himself an independent. Another deputy has said he will not vote for the austerity package. But the measures must be passed by Parliament before the end of the month if debt-ridden Greece is to continue receiving funding from its international bailout.

Greek Prime Minister George Papandreou and European Council president Herman Van Rompuy after their crisis talks at the EU
headquarters in Brussels. Picture: AFP Source: The Australian
Greek crisis going global: IMF
The Australian
David Charter, Sam Fleming, The Times
Wednesday, June 22nd, 2011

LUXEMBOURG: Greece's debt problems could spiral into a world banking crisis, the International Monetary Fund warned yesterday. The IMF, which has contributed to the bailouts of Greece, Portugal and Ireland, urged the 17 eurozone countries to take "decisive action" and turn themselves into a "fully integrated" monetary union to prevent the debt crisis spilling around the world.

The call to action came as researchers in London warned that the "ultimate burden" from Greece defaulting on its debts could fall heavily on the US and British banks because they were so deeply tied into the world financial system. Fathom Financial Consulting will say in a major report to be published overnight: "The notion that Greece can fall alone is fanciful and dangerous. Greece will not suffer alone — the implications of the default will reverberate far and wide."

Eurozone finance ministers yesterday increased the pressure on Athens by refusing to release the next promised bailout cheque of €12 billion ($16.3bn) to pay Greek debts until its government approves austerity measures and a huge privatisation program. The delay in approval sent a chill through the financial markets, with the euro losing ground against the US dollar and bank shares sliding. A mission of eurozone, IMF and European Central Bank officials were expected to arrive in Greece overnight to ensure their demands have been written into draft Greek legislation. An official from one eurozone country said: "If we gave the green light for the €12bn, then it would be a blank cheque — and then the credibility of the zone is at stake as well."

In a report on the euro area, the IMF said the sovereign debt crisis threatened to overwhelm an otherwise favourable economic outlook for the region. Action was needed in the interests of the entire world, the fund said. "With deeply intertwined fiscal and financial problems, failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers."

Danny Gabay, an economist at Fathom, said: "We are heading towards a disorderly unwinding of this, and to me it is palpable how much like the Lehman debacle it is. Someone sold a lot of insurance and guarantees against this sort of event. From the data, that someone looks like Britain and the US." The British banks' exposure to eurozone countries, including Greece, Italy, Spain, Ireland, France and Germany, amounts to €412bn. This includes contracts insuring investors against debt defaults. The equivalent figure in the US is far higher, at $US1.8 trillion ($1.7 trillion).

Some leading analysts fear Greece will be unable to survive in the euro area and could be forced to exit. Mark Hoban, a British Treasury minister, ducked questions in Britain's House of Commons yesterday on whether the euro would survive in its current form. But the former foreign secretary, Jack Straw, said the euro "cannot last" as he urged the government "to be open with the British people" about the alternatives to a European single currency. The Labour MP said there was a "mood change" in Europe, with former europhiles "contemplating the end of the euro as we know it".

The IMF's European director, Antonio Borges, said: "We have an imbalanced system, and what we are trying to say is that in a process like monetary union, until you become fully integrated like the United States with a fully integrated monetary union, you have these obstacles which magnify the problems."

Greek Prime Minister George Papandreou was expected to face a confidence vote in his new cabinet overnight, and has vowed to push through a promised €28bn austerity package by the end of the month. A widely opposed €50bn privatisation program has yet to be signed off by the parliament. Eurozone ministers have decided to meet on July 3 to check Greece has adopted all the EU-IMF measures, and then release its next bailout payment.

Protesters against austerity measures clash with riot police during a 48-hour general strike in Athens, Greece.
Picture: AFP Source: Herald Sun
Greek MPs approve austerity measures
The Australian Online
Friday, July 1st, 2011 8:09AM

GREEK MPs have voted through the details of fresh austerity measures, but objections from all sides on parts of the plan served notice of fresh rows ahead after days of rioting in Athens. But the European Union said Greece had now met the conditions set by the eurozone to receive the next instalment of its bailout to avoid defaulting on its debts.

With government cuts accelerating right across a nervous Europe, the final count at 5:15pm local time showed Prime Minister George Papandreou secured 155 yes votes "in principle" out of 300 MPs, freeing him to put the previous day's outline backing into practice. The EU and International Monetary Fund had set a deadline of June 30 for Greece to pass the $39 billion package of tax rises, spending cuts and privatisations to be implemented through until 2015.

The vote was conducted in two parts: opposition conservatives voted no "in principle," but said they would support individual articles covering privatisation, spending cuts and plans to lease out government-owned real estate. There were 136 voices against and five voted "present", with four absent during the voting. An opposition conservative who voted yes on Wednesday to the need for austerity switched back to no on some details. There was also a new rebel among the governing Socialists, who expelled one member on Wednesday, reducing Mr Papandreou's majority to four. This MP voted yes in principle, but no on the second count for individual clauses.

The voting crossover matters because annual budget votes will still be required to drive through plans that protesters say will only result in more slippage until the Greek government is replaced. Despite the threat that rows on individual measures will resurface, eurozone finance ministers meeting in Brussels on Sunday can now unblock $16 billion of emergency funds to beat a July deadline and avoid bankruptcy. They will then start the real job of drawing up a second bailout of a similar size to last year's $150 billion rescue.

"The conditions are now in place for a decision on the disbursement of the next tranche of financial assistance for Greece and for rapid progress on a second assistance package," EU president Herman Van Rompuy and European Commission chief Jose Manuel Barroso said in a joint statement. As seen in similarly tough budgetary rewrites in Britain, France, Italy and fellow bailout recipient Portugal, the pressure is firmly on to prevent damage to neighbours with high debts of their own on financial markets.

Finance Minister Evangelos Venizelos warned during pre-voting debate that his government faces fresh fights even beyond tinkering deep down among the details. The volume to be contributed by private banks has caused ructions among EU partners, which Belgium's Finance Minister Didier Reynders said are unlikely to be resolved before further July 11 talks. And Mr Venizelos raised another problem chestnut by saying "countries like Finland," a gold-plated eurozone economy influential in Brussels, also want Athens to put up collateral. He said Helsinki "wants guarantees over and above those compatible" for Athens with EU rules of solidarity. Greeks fear real estate or even islands being sought as lose-able collateral for government finance, as with home loans.

Greece's debt pile is variously put at 330-350 billion euros ($448-475 billion). Outgoing European Central Bank figures laid bare divisions on how fast to cut: president Jean-Claude Trichet said "corrections" are needed to create jobs, whereas executive board member Lorenzo Bini Smaghi warned of "unprecedented masochism".

After the violent scenes in Athens during Wednesday's vote, the city was quiet overnight as city workers and store owners pursued the mammoth clean-up job on the streets around the parliament's home in Syntagma Square. But protesters known as Indignants were still camped out as the government announced an inquiry into alleged police brutality during the rioting. Blocks of downtown Athens resembled a battlefield for hours, blanketed by tear gas as bat-wielding hardcore elements fought sometimes alongside police hurling rocks and tear gas into enclosed spaces while medics carried bloodied casualties away.

EU heavyweights French President Nicolas Sarkozy and German Chancellor Angela Merkel. Picture: AFP Source: AFP
Same Day Commentary
How Europe's elites turned PIGS into a full-bore financial disaster
The Australian
Henry Ergas

WHY is Europe in crisis? To fund budget deficits over the period 2011-13 and repay existing loans, Portugal, Ireland, Greece and Spain (the "PIGS") require external financing equal to 50 per cent of their combined 2010 gross domestic product.

Financial markets do not believe that financing will be available on terms those countries, particularly Greece and Portugal, can afford. They therefore perceive a high risk of default, which increases risk premiums and pushes up the PIGS' borrowing costs, aggravating budget deficits (as it raises the cost of servicing public debt) and making default even more likely. But default would impose large losses on eurozone banks that hold PIGS' debt and undermine the eurozone's viability. And even if default is avoided, the debt-burdened PIGS are headed for prolonged recession, fuelling tensions within the EU and making sustained growth less likely.

Is this the first time these countries got into trouble? Hardly. The drachma (meaning "handful") for example is one of the world's oldest currencies. But since the reintroduction of the drachma in 1832 (following the Greek War of Independence, successfully waged against the Ottoman Empire), Greece has spent more time in default on its loans than any other European country, including Russia.

Why does the pattern of incurring massive debts and running into trouble recur? It reflects social conflicts that are especially pronounced in southern Europe, which for many years had fascist regimes and only quite recently made the transition to democracy. Those conflicts make it difficult to levy taxes, while creating pressures to rely on public expenditure to paper over the social cracks. They therefore lead the PIGS to spend more than they earn, precipitating periodic crises that bring growth to a crashing halt.

How did they get into trouble this time? The PIGS joined the euro at a time of relatively low inflation. This was reflected in low interest rates, including those set by the new European Central Bank.

But monetary settings that were sensible for Frankfurt were completely inappropriate for Athens. Inflation was significantly higher in the PIGS than in northern Europe, so the ECB's policies made real interest rates (the nominal interest rate minus the expected inflation rate) in the PIGS zero or even negative. Those low rates reduced the cost of debt and made new borrowing very attractive.

What form did the response take? This depended on each country's financial development.

Spain, for example, has a sophisticated banking sector. Faced with zero real interest rates, Spain's banks expanded their loans to households and businesses, unleashing a property boom. Spanish property prices more or less doubled and by 2006, when its inflation rate was the highest in Europe, Spain's building spree was consuming half of Europe's cement.

By contrast, financial markets are far less developed in Greece and Portugal, so voters elected governments committed to borrowing on their behalf and expanding the public sector. Unsurprisingly, by 2008 Greek public debt amounted to 100 per cent of GDP.

Where did the money come from? While the PIGS were on a borrowing binge, northern Europe was in the midst of a fiscal consolidation. This was especially true of Germany, which was working off debts incurred in its reunification. Together with wide-ranging wage restraint, that fiscal consolidation resulted in low inflation and declining unit labour costs.

So while prices in Spain rose from 2000 to 2007 by 8 per cent more than in the eurozone as a whole, in Germany they rose by 4 per cent less. Given low inflation, real interest rates in northern Europe were relatively high, encouraging households to save. Along with reduced budget deficits, this meant northern Europe spent less than it earned, while the PIGS did the opposite.

How did the imbalances play themselves out? Declining unit labour costs made goods from northern Europe very competitive compared with those from the PIGS, where debt-fuelled growth was pushing up producers' costs. In real terms, Germany devalued (its exports became cheaper) while the PIGS revalued (PIGS goods became more expensive).

The result was large current account imbalances, as the PIGS increased their imports. From 2000 to 2007, Portugal racked up a cumulative trade deficit of 71 per cent of GDP, Greece of 67 per cent and Spain of 46 per cent. Germany, by contrast, accumulated a cumulative surplus of 26 per cent of GDP, while its exports to Greece increased by 130 per cent.

The EU hailed growing intra-EU trade as a triumph of European integration. In fact, it was a disaster waiting to happen as the corresponding deficits were financed by loans from northern European lenders to commercial borrowers and governments in the PIGS.

By 2010, the exposure to the PIGS by lenders in Germany, Britain and France was around $1.2 trillion. And like the Asian economies in the 1990s the PIGS, committed to servicing large loans in a currency they did not control, were now vulnerable to collapse when the inflows suddenly stopped and then reversed.

Where were the regulators? Rather than restraining the process, Europe's politically correct regulators were encouraging it. For instance, European banks were required to treat all euro-denominated public debt as having equal default risk for the purposes of prudential requirements. This made it highly profitable for European banks to replace low-yielding German debt with far higher yielding PIGS debt.

What happens next? With so much at stake the EU, helped by the International Monetary Fund, will bail the PIGS out, courtesy of European taxpayers. The PIGS will undertake reforms but will not address the root causes of their periodic crises. And with slow growth ahead for southern Europe, and a fragile, unpopular euro, tensions within the EU will become ever more acute.

Lessons? Here's one. Much like Europe's emissions trading scheme, the euro was a "solution" imposed by Europe's political elites. For the French, it would challenge the despised US dollar; for the Germans, it would buy French acceptance of reunification and a more assertive Germany; and for southern Europe's socialists, it promised to painlessly transform Sicily into Switzerland. All this proved no more than magical thinking. But because bad policies are easier to introduce than to remove, its costs will be there for years to come.

What can prevent such poorly conceived ideas from getting up? Robust, even divisive, public debate. No wonder elites hate it. No wonder it played no role in the decision to adopt the euro. And no wonder Ross Garnaut says arguing about a carbon tax makes us look foolish compared with how they do things in Europe.

Well, if that is foolishness, long may it continue.

Click here for a July 30 report regarding the background of Greek Prime Minister Mr Papandreou and Opposition leader Mr Samaras

Click here for a same day interview with Czech Republic President Vaclav Klaus

Angela Merkel and Nicolas Sarkozy in Berlin last night AFP
French and German leaders forge banks pact
The Australian Online
William Boston, The Wall Street Journal
Additional reporting: William Horobin
Monday, October 10th, 2011

GERMAN Chancellor Angela Merkel and French President Nicolas Sarkozy said they have reached broad agreement on a plan to shore up Europe's battered banks and restore stability to the euro-zone. Speaking to reporters in the Berlin chancellery ahead of a working dinner as aides and ministers from both governments looked on, Mrs Merkel and Mr Sarkozy provided few details of the plan, pledging to unveil a comprehensive solution to the nearly two-year-old euro-zone debt crisis by the end of the month. The plan will include a sweeping recapitalisation of European banks endangered by a possible sovereign default in Greece as well as changes to existing European treaties to accelerate integration of the 17 euro-zone countries.

"We are determined to do what is necessary to guarantee the recapitalisation of our banks," Mrs Merkel told reporters. "We will make proposals in a comprehensive package that will enable closer cooperation between euro-zone countries that will include changes to treaties." The German and French leaders declined to provide any further details about how they envisage Europe could recapitalise its banks.

Reports in the German press over the weekend suggested that Europe could require its banks to raise the amount of capital they hold to 10 per cent of their assets, up from 8 per cent as now required by Basel II agreements. The leaders wouldn't comment on the idea. "It's not the moment to go into details of all questions," said Mr Sarkozy.

The meeting between the two leaders was the latest of several bilateral talks to find a common strategy to resolve the euro-zone debt crisis and also aimed to strike an agreement ahead of a meeting of European Union leaders next week in Brussels. Europe is under increasing pressure from the US and other members of the Group of 20 industrial and developing nations that have been meeting over the past three years to bolster the global economy against the effects of the financial crisis and subsequent global recession. Amid the emergence of the euro-zone's sovereign-debt crisis nearly two years ago, Europe has become the potential flashpoint that could spark a new global recession and financial crisis.

Now the focus is on the ability of Europe's major banks to withstand the shock of a sovereign default in the euro-zone. Euro-zone countries are in the process of ratifying the temporary bailout fund, the European Financial Stability Facility, or EFSF, which would have lending capacity of €440 billion ($602bn) as a backstop for European banks in the event of a liquidity squeeze that could result from Greece defaulting on its debt. There has also been speculation that France and Germany disagree over how the fund should be used as a backstop for Europe's banks. Both Mrs Merkel and Mr Sarkozy face political pressures that are becoming increasingly enmeshed with Europe's search for a solution to the euro-zone debt crisis.

Facing a revolt to further bailouts among members of her centre-right coalition, Mrs Merkel insists that banks should first seek capital from shareholders, then from their national governments. Only as a last resort should governments tap the EFSF to immunise their banks against financial contagion.

Mr Sarkozy, struggling to hang on to voters at home ahead of presidential elections in the spring, wants to allow euro-zone members to tap the EFSF immediately rather than first force banks to try to raise capital in the market. French banks are among the most exposed to troubled sovereign debt. And compared with European peers France's big banks aren't as well capitalised, the International Monetary Fund warned in July.

Despite the apparent rift between Germany and France over tapping the EFSF to recapitalise European banks, Mr Sarkozy said there was "total agreement" between Paris and Berlin. The German and French leaders said they had faith in work of the so-called Troika to assess the depth of Greece's debt woes. The Troika is the informal name a commission that includes experts from the International Monetary Fund, the European Commission, and the European Central Bank that is working on a report to determine the extent of Greece's financial need and whether Athens is really implementing the structural reforms it promised in exchange for aid.

A next tranche of about €8bn for Greece has been delayed until November, pending the Troika's report. "We think the Troika will propose a sustainable solution for Greece," said Mr Sarkozy. "We are working closely with the Troika. Greece is part of the euro-zone and we will find solutions to ensure the financial stability of Europe and a long term solution for the Greek problem."

France's Finance Minister Francois Baroin, with US Treasury Secretary Timothy Geithner, has promised answers
on the euro debt crisis. Source: AFP
Europe pledges action on debt woes
The Australian
AFP , Bloomberg, The Sunday Times
Monday, October 17th, 2011

EUROPE has vowed to take swift and decisive action to resolve the debt crisis that is threatening to drag the world into recession. A new strategy to beat the two-year sovereign debt crisis yesterday won the backing of global finance chiefs, who urged the region's leaders to deal with the turmoil at emergency talks this weekend. European officials outlined the initiatives they are considering at a meeting in Paris of finance ministers and central bankers from the Group of 20 economies. Governments were urged to complete the plan at their summit in Brussels on Sunday and to tame the threat of contagion by maximising the power of their E440 billion ($590bn) bailout fund.

Speaking after the G20 meeting, French Finance Minister Francois Baroin pledged that the eurozone would provide clear answers on Sunday. "The results of the October 23 summit will be decisive," he said. "We are acting resolutely to maintain financial stability." US Treasury Secretary Tim Geithner said he had heard "encouraging things from our European colleagues" about a new plan to deal with the crisis.

Europe's strategy, which has still to be made public, includes writing down Greek debt by up to 50 per cent and multiplying the strength of the new European Financial Stability Facility. Mr Geithner said the plan includes a more substantial financial firewall to ensure the governments of Europe can borrow at sustainable interest rates, a broad recapitalisation of banks, further support for Greece, and steps towards fiscal union. "The plan has the right elements," he said, but cautioned: "They clearly have more work to do on the strategy and the details."

British Chancellor George Osborne said the European officials "will have left Paris under no misunderstanding there is a huge amount of pressure on them to deliver a solution". Next weekend "is the moment people are expecting something quite impressive". Brazilian Finance Minister Guido Mantega said the G20 nations were united behind them "but the solutions are in the hands of the Europeans". German Finance Minister Wolfgang Schaeuble said the Europeans were aware of their responsibility. "We will resolve our problems, we are determined to take decisions by Cannes," he said, referring to a summit of G20 leaders in the French city on November 3 and 4. He conceded that a proposed financial transaction tax at the global level was "not realistic", but said Europe should go it alone. The idea of a tax on financial market transactions has been pushed hard by German Chancellor Angela Merkel and French President Nicolas Sarkozy.

As the ministers met, more than a hundred thousand people were marching in cities around the world for a day of protest inspired by the "Occupy Wall Street" and "Indignant" movements. International Monetary Fund chief Christine Lagarde warned that the weakness of advanced economies "is beginning to hit the emerging countries" that had supported the world economy in the last economic crisis. "We heard a lot from the emerging markets that they are very concerned about the risk of contagion," Ms Lagarde said. But the G20 ministers sidestepped whether to increase the resources available to the IMF, the world's lender of last resort. Instead they committed to ensuring the IMF has adequate resources. Mr Geithner said the IMF had nearly $US400 billion ($386bn) in uncommitted resources.

Meanwhile, China has made a secret commitment to prop up the eurozone in exchange for sweeping budget reforms and further public sector cuts across the 17-nation currency bloc. Sources close to the talks said China had indicated its willingness to pump tens of billions into the eurozone by buying infrastructure from debt-crippled countries, and Chinese banks would increase purchases of sovereign debt to prop up ailing nations. But the Chinese delegation is demanding more budget cuts and reforms before committing the cash. The Chinese delegation wants to see evidence Europe can cope with the rising cost of state pension and welfare payments across the continent.

Extract: Jose-Manuel Barroso says a solution to the eurozone crisis is 'within reach'
The Australian
Matina Stevis, Wall Street Journal
Sunday, October 23rd, 2011

EUROPEAN finance ministers have edged toward an agreement on recapitalising the region's banks, but fell short of a final plan as they continued to debate options to boost the region's debt bailout fund to stem the spreading debt crisis. After a 10-hour meeting on the bank recapitalisation plan, some officials appeared optimistic EU leaders would agree on a comprehensive response to the sovereign debt crisis at a summit today or a follow-up meeting Wednesday. "I believe that the finance ministers have made progress and that we will achieve our ambitious goals by Wednesday," Ms Merkel told reporters on her way into a dinner sponsored by the European People's Party.

European Commission President Jose-Manuel Barroso said that a solution is "within reach" while Mr Sarkozy said leaders faced several more days of "absolutely crucial meetings." After the bank plan meeting — that forced UK Finance Minister George Osborne to skip his flight home — Swedish Finance Minister Anders Borg said there had been "some progress" during Saturday's talks. But Mr Borg admitted they had not sealed agreement on at least one key aspect — raising the minimum tier one capital ratio banks must hold. "We have laid the foundation for an agreement on the capital ratio question," he told reporters on his way out of the meeting. "We made some progress on the bank recapitalisation side." Mr Osborne said the ministers had "come to important decisions on strengthening European banks."

The bank recapitalisation plan was expected to be the easiest of the three main items on the ministers' agenda, which also includes the size of private sector writedowns of Greek debt and what to do with the European Financial Stability Facility. The three issues — Greece, the EFSF and the bank plan are closely linked. The size of the recapitalisation was dependent in part on how big a haircut governments would demand of Greece's private creditors since the bigger the haircut, the greater the losses European banks could suffer. And governments' ability to plug the gap in banks' balance sheets will depend on the firepower of the EFSF.

A senior eurozone government official said EU governments were more likely to agree on a minimum 50 per cent reduction in the net present value of Greek debt held by private creditors after a report by the European Commission, the IMF and the ECB indicated that Athens would need far more aid than earlier agreed if there is no increase in the private sector writedown on Greek debt. A debt responsibility report on Greece said if the July deal offering Greece $A145 billion in assistance is to stand, private creditors would have to take a 60 per cent haircut on their bondholdings for Greece's debt situation to be sustainable.

"All ministers knew the Greek situation is difficult, but for some the troika report was still a shocker," the eurozone government official said. He said the report has increased the odds for a much deeper haircut than the 30 per cent that some eurozone members had advocated. But the official noted that there had been little preparation and discussion among private holders of Greek debt for such a plan, which they have firmly opposed so far.

Italian Prime Minister Silvio Berlusconi at a eurozone EU summit in Brussels at the weekend. Source: AFP
Europe at mercy of the markets as Italy teeters
The Australian Online
Charles Bremner and David Charter, The Times
Wednesday, October 26th, 2011

A COMPREHENSIVE package to save the eurozone from collapse was unravelling today, putting the single currency once again at the mercy of the markets. Silvio Berlusconi's Italian government appeared days from disintegrating after a deadlock over austerity measures demanded by Europe raised the prospect of another ailing economy coming under siege.

Hopes were fading, meanwhile, that an emergency summit starting tonight could deliver the "comprehensive solution" that European leaders had promised would rescue the euro. Two of the three main elements of the salvage plan remain unresolved, prompting the abrupt cancellation of a meeting of finance ministers which had been due to approve the detail. One European diplomat told The Times that they were not certain how the eurozone's political and economic difficulties could be resolved.

Sir Mervyn King, the Governor of the Bank of England, gave a similar assessment to the Treasury Select Committee. "The aim of the measures to be introduced over the next few days is to create a year or possibly two years' breathing space. The underlying problems still have to be resolved," he told British MPs. British Prime Minister David Cameron will still join his 26 fellow leaders for talks in Brussels tonight, but Downing Street emphasised that this was now an "informal" meeting and he would leave for a planned trip to the Commonwealth Heads of Government meeting in Perth whatever the outcome.

European officials conceded that the 17 eurozone countries had yet to reach final agreement on how to reduce Greece's huge debts, and still had no clear way of boosting the firepower of the bailout fund. A third summit in eight days may now be staged this weekend, to try to reach agreement before next week's G20. However, some leaders concede that a resolution may still take weeks, putting at risk any attempt to involve the IMF or sovereign wealth funds in a wider rescue package.

One document suggests that leaders will be unable to put a figure on the size or shape of the bailout mechanism, the European Financial Stability Facility. Signs that the final package may amount to 1 trillion euros — half of what many had predicted — are likely to underwhelm the markets. Difficulties also remain over the size of the planned writedown of Greek debt, amid warnings that a "haircut" of up to 60 per cent would trigger big payouts of credit insurance and cause huge turbulence in global markets.

The Italian government has been pushed towards collapse after the cabinet failed to agree on reforms to pensions and the labour market demanded by the rest of the eurozone. The Northern League, a government partner, has refused to raise the pension age to 67 and its members spoke last night of the possibility of the coalition breaking up.

In a sign of the continuing disarray before the seventh attempt this year to save Greece and halt the contagion to other states, Poland, the president of the EU states, called off the EU finance ministers' meeting that was supposed to sign off the new eurozone package before the evening summit. The Polish decision reflected tension between the zone members and the 10 "outs", including Britain, which are being sidelined from the German-French-run zone.

Anticipating another setback, Francois Fillon, the French Prime Minister, sounded the alarm yesterday, warning: "If the summit is a failure, this could tip the European continent into unknown territory." President Nicolas Sarkozy was reported as saying: "The whole construction of Europe since 1945 is at stake." George Papandreou, the Greek Prime Minister, whose country triggered the sovereign debt turmoil, implored his colleagues to act. "Now is the hour for Europe itself to take the decisions to stop this crisis which creates insecurity among all European peoples."

Greek PM George Papandreou, right, hugs his Luxembourg counterpart alongside Italian Prime Minister Silvio Berlusconi. Source: AFP
Europe steps back from brink of debt crisis
The Australian
Peter Wilson, Europe correspondent
Friday, October 28th, 2011

A GLOBAL credit crisis was averted yesterday when leaders agreed on a rescue package for Greece and the euro common currency that is likely to involve China and other developing countries helping to prop up the European economy. Equity and currency markets reacted positively to the long-delayed rescue plan, which came after ominous warnings from German Chancellor Angela Merkel that continued "peace and affluence" in Europe could not be taken for granted without a euro solution.

French President Nicolas Sarkozy said he would call his Chinese counterpart, Hu Jintao, to plead for cash-rich China's involvement in a new support mechanism called a "special-purpose investment vehicle", with the unfortunate acronym SPIV. "I think the whole world is going to be relieved by this," Mr Sarkozy said.

The most eye-catching aspect of the rescue plan was an agreement that banks and other private lenders would accept a 50 per cent loss on Greek government bonds to give the teetering Greek economy some hope of fighting its way back to viability. That is expected to cost the banks €150 billion ($199.5bn), but it should reduce the Greek government's debt from 186 per cent of GDP to a more sustainable 120 per cent by 2020. Under the plan, the eurozone's main rescue fund will be more than doubled to over €1 trillion, with extra funding coming from developing countries, sovereign wealth funds and the IMF. A relieved Greek Prime Minister, George Papandreou, exulted in the deal, saying "a new day has come for Greece, and not only for Greece but also for Europe".

Australia's S&P/ASX200 index rallied 2.5 per cent after news of the rescue package — albeit in an unusual truncated trading day caused by a technical fault in the ASX's trading systems. European markets opened strongly last night.

The all-night meeting in Brussels was one of the most significant in the history of the European Union because of an agreement that, to avoid such near-death experiences in the future, the 17 nations that use the euro would co-ordinate their economic policies in an unprecedented way, meaning the greatest ever centralisation and "deeper union" within the eurozone. That will effectively split the EU into a two-tier organisation with an "inner core" of the 17 common currency nations pursuing fiscal union and an outer grouping of 10 non-euro nations led by Britain, Poland and Sweden.

Attention at the summit focused on fears about a possible spread of the credit crisis from Greece to Italy, the world's eighth-largest economy, with the resulting tension in Rome spilling over into a fist fight in the Italian parliament. Despite that pressure, Prime Minister Silvio Berlusconi failed to produce the concrete moves demanded by other European countries to slash Italy's debt, instead offering a list of unconvincing promises that prompted speculation that he could step down from his job within months. Mr Berlusconi vowed to balance Italy's budget within two years but there was little confidence that he would take the tough reform measures needed to revive growth, cut red tape and trim government debt worth 118 per cent of GDP.

While the rescue deal averted financial disaster and bought time for European leaders to tackle badly needed economic reforms it also raised fears of a prolonged period of slow economic growth because of renewed austerity measures and a possible slowdown in bank lending. Many banks in Greece and Cyprus are likely to be taken over by their governments because of those losses and banks in Italy and Spain will also suffer. The summit agreed to force European banks to take on €106bn of new capital over the next eight months to strengthen balance sheets and ensure they can survive the 50 per cent loss, or "hair cut", on Greek sovereign debt. The banks had fiercely resisted a loss of more than 40 per cent but compromised after face-to-face talks involving Mrs Merkel of Germany who had demanded a 60 per cent "haircut".

The IMF's involvement in the eurozone's €1 trillion rescue fund will be discussed at next week's G20 summit in Cannes but the international relief at the European rescue deal means it is almost certain to be approved by the world's major economies.

Australia will be indirectly responsible for 1.36 per cent of any IMF commitment, on top of €36.5bn of recent IMF contributions to Greece, Ireland and Portugal which have meant an Australian involvement of €500m. Wayne Swan has insisted that Australia would support a deeper IMF role as long as Europe did not shirk its responsibility in the crisis and he indicated last night that he was almost certain to back the proposed involvement of the global lender of last resort. "The global community must support Europe as it moves forward from here," the Treasurer said. "That's why we have been advocating through the G20 a plan to ensure the adequacy of IMF resources to support adjustment in Europe and stability in the global economy. "This is the message we will again take to the G20 leaders' summit in Cannes next week. Europe is building its war chest, but the war has not yet been won. It still faces a difficult period ahead, which means global volatility is likely to continue for some time. The situation in Europe will continue to have an impact on our region, our economy and our budget bottom line."

European leaders stressed that many details were yet to be resolved after their talks stretched to 4am in Brussels, but one feature worrying many economists is that banks may cut back on their loans to the real economy because of their newly announced debt losses and forced recapitalisation. A real danger is that banks will respond to the new requirement that they strengthen their balance sheets and capital ratios by June next year by cutting back the number of loans they issue instead of by taking on new capital in a depressed equity market. The European leaders said they would explore changes to EU treaties to centralise economic decision making, as one of the main structural flaws of the euro has been the operation of 17 fiscal strategies and national approaches to tax and spending under the umbrella of one currency.


What price China's aid, EU asks itself
Weekend Australian
The Times
Saturday, October 29th, 2011

EUROPE'S desperate appeal to China for help in the euro crisis sparked consternation in Western capitals yesterday over what far-reaching concessions China might demand in return for handing out billions in aid. There were reports last night that China, with $US3.2 trillion ($2.99 trillion) in reserves, could contribute between $US50 billion and $US100bn to the European Union emergency fund if the conditions were right. Fund chief Klaus Regling was due to fly to Beijing last night to woo investors.

The appeal to China underscored the precipitous decline in Europe's economic strength, and there were rising concerns last night China would demand far-reaching political and economic concessions in return for aid. In France, Socialist candidate Francois Hollande, who is favourite to beat Nicolas Sarkozy in the presidential election next year, said he was "deeply troubled" by the overtures to China. "Can one imagine that if China comes to the rescue of the eurozone, it will do so without anything in return?" he asked. "This is in reality a dependence which amounts to a confession of weakness."

An editorial by the state-run news agency gave a telling flash of Beijing's teeth as the country prepares to play a role it has rehearsed and dreamt of for years. The language was darkly evocative. Written just two weeks after a two-year-old Chinese girl was run down and 18 people were filmed ignoring the mangled child, the Xinhua editorial asserted China would not be a "bystander" of the eurozone crisis and that emerging economies "should not be seen as the EU's good Samaritans". China's largest trading partner bloc, ran the clear subtext, was a helpless, bleeding toddler in need of urgent life-support.

China's proposed role in helping to rescue Europe brings into sharp relief profound shifts under way in global economic power. Emerging markets were the supplicants when the International Monetary Fund was called upon to rescue their economies in the 1990s. Now the tables are turned, with China relishing the prospect of enhancing its world political stature by helping stricken developed economies. Beijing has clearly signalled there will be strings attached to its munificence. On his recent tour of Europe, Prime Minister Wen Jiabao repeatedly employed the narrative of "partnership".

Beijing would dearly like to be granted market economy status by the EU and its participation in the deal may well guarantee that. Its previous assistance to Spain and Greece has made it far more awkward for Madrid and Athens to criticise Beijing's human rights record, and China would hope to include more countries in that group. China would also welcome an end to the EU arms export embargo, and knows it has a rich vein of sympathy for that among some EU members. It also knows the US and Japan would object in the most vehement terms; China may choose to expend the considerable political capital it will win from the bailout at a more tactical pace.

China is as worried about a contagious European financial crisis as everybody else. About 25 per cent of its exports go to the EU and it cannot afford for that to fall.

Greek Finance Minister Evangelos Venizelos, tipped to become prime minister, attends a crisis meeting yesterday. Getty Images
Papandreou agrees to handover
The Australian
Peter Wilson, Europe correspondent
Tuesday, November 8th, 2011

GEORGE Papandreou has agreed to step down as Greece's Prime Minister, completing a clean sweep of bailout countries after this year's dumping of the Irish and Portuguese governments, and increasing the pressure on Silvio Berlusconi of Italy. Mr Papandreou and opposition leader Antonis Samaras yesterday agreed to the formation of a temporary national unity government to implement a European bailout package to save the country from bankruptcy. Mr Papandreou said he would take no part in the new government; he was negotiating with Mr Samaras last night on who should be prime minister and the timing of the next election. The new PM was to be announced last night as the Greek leaders rushed to convince markets and other European governments that under a new and broadly based regime their country would accept the austerity demanded by the bailout package.

That shifted the focus of the European financial crisis to Rome, where Mr Berlusconi was struggling to cling to office after being humiliated by other leaders at the G20 summit in Cannes last week. The International Monetary Fund took the unprecedented step at the summit of beginning regular monitoring visits to check that Italy was keeping its reform promises. The 75-year-old billionaire faces a dangerous test of parliamentary strength in a budget vote today with his aides warning that a growing stream of defecting MPs may have already cost him his majority in parliament.

IMF chief Christine Lagarde told reporters at the Cannes summit that the main problem hanging over the reform plans of debt-laden Italy was Mr Berlusconi's lack of credibility. Mr Berlusconi has led the country for most of the past 17 years but he has repeatedly broken promises to liberalise and invigorate Italy's stagnant economy.

Mr Papandreou, 59, is only two years into a four-year term of government but his leadership was doomed by his inability to win public and opposition support for the painful spending cuts, tax rises and job losses imposed by a European bailout package. The head of the centre-left Pasok party infuriated other European leaders by announcing a public referendum on the bailout package, prompting the European Union to warn that desperately needed loans and debt relief would be withheld until Greece endorsed the bailout package. All of Greece's political parties will be invited to join the new unity government, which is expected to share the political blame for implementing the austerity package before holding an election sometime between next month and March.

The political death toll of Europe's financial crisis began in February when Ireland, the first country to require a bailout package, voted out the party of prime minister Brian Cowen. Jose Socrates stood down as Portugal's prime minister a month later when it became clear that his country would also need a bailout. The Slovakian government has since become collateral damage of the euro debt crisis with Prime Minister Iveta Radicova's coalition falling apart last month because of internal resistance to the bailout of Greece, forcing her to call an early election for March.

The new Greek prime minister could be incumbent Finance Minister Evangelos Venizelos, or a less political technocrat such as Lucas Papademos, a respected former head of Greece's central bank. Olli Rehn, the EU's commissioner for economic affairs, kept up the pressure for swift action by warning that rescue funds would not be released until Greece showed that it had broad political support for the bailout and for years of painful austerity. The relief package would slash Greece's debts by one-third and help it to avoid being expelled from the euro and the EU.

The rapid developments in Greece increased the pressure on Italian MPs to take their own steps to reassure financial markets and the EU, perhaps by appointing their own coalition government led by a technocrat such as former EU commissioner Mario Monti. The collapse of confidence in the Berlusconi regime among international investors has pushed the risk premium on Italian government bonds to dangerous new heights, making it more expensive for the government to finance its massive debts. At €1.9 trillion ($2.52 trillion) Italy's public debt is equal to 120 per cent of its annual economic output. The government could be pushed into a grim spiral of borrowing more money simply to pay its interest bill unless it can stimulate new economic growth.

Lucas Papademos has been asked to become Greece's acting prime minister. Picture: Samuel Kubani/AFP
Greek caretaker spells out demands
The Australian Online
Peter Wilson, Europe correspondent
Wednesday, November 9th, 2011

THE Harvard University professor who has been asked to serve as Greek prime minister for the next 14 weeks was last night spelling out his demands before accepting the job of saving his near-bankrupt nation. Lucas Papademos, 64, an economist and former central banker, flew from Boston to Athens to offer his list of demands to President Karolos Papoulias.

Outgoing Prime Minister George Papandreou had suggested Mr Papademos as a respected "technocratic" figure with strong European links who could head a temporary broad coalition to steer Greece through the credit crisis and win a quick resumption of European bailout funds. Mr Papademos was pushing to be more than a figurehead, demanding more autonomy than the major parties had planned and insisting he had to have political heavyweights in his cabinet, such as outgoing Finance Minister Evangelos Venizelos, to help him initiate painful austerity moves.

Ambitious ministers and opposition figures were wary about taking part in a tough-minded administration amid strikes and riots instead of positioning themselves for the longer-term government that is supposed to be elected in February. Leading politicians complained that it was undemocratic to draft in a non-political outsider as PM, noting that broad coalitions sit uneasily in a Greek political culture that has been riven by ideological splits since a 1940s civil war, which was followed by right-wing dictatorship and left-wing violence.

But Konstantinos Michalos, the president of the Athens Chamber of Commerce and Industry, spoke for many Greeks who were relieved by the prospect of a reprieve from the political deadlock that has compounded the nation's credit crisis. "We have seen what the politicians can do in the last two years and I think it leaves a lot to be desired," Mr Michalos said yesterday. "The Greek people want to remain part of the euro and part of the European Union." If a technocratic administration could achieve that, it was worth trying, he said.

The shift to an emergency coalition in Athens caused envy in Rome, even among members of Silvio Berlusconi's crumbling centre-right coalition. Following a meeting between Mr Berlusconi and President Giorgio Napolitano, the president's office said in a statement that once key reforms were adopted later this month, the prime minister would submit his resignation. Mr Berlusconi's announcement came after he lost his parliamentary majority (Tuesday), sounding the death knell for his centre-right coalition.

The greatest worry for investors and many voters was that Italy's fractured centre-left opposition parties seemed just as unlikely as Mr Berlusconi's regime to restore the sort of economic confidence that might ease the enormous pressure building up over Italy's stagnant economy and €1.9 trillion ($2.5 trillion) debt.

Furious Greeks revive ghosts of Nazi past
The Australian
Roger Boyes, The Times
Monday, November 14th, 2011

THE angry anti-austerity movement in Greece has embarked on a propaganda war against Germany, evoking the symbols and images of the Nazi occupation. Greeks fear that the eurozone heavy-hitters, and above all Germany, are using the financial crisis to set up a permanent protectorate in southern Europe. Greece is sensitive to German ambitions. The country suffered under Germany in World War II and compensation cases are still pending in the International Court of Justice.

Greek commentators have started to remember a post-war Greek film classic depicting the nightmares of a former partisan adjusting to the modern world, screaming in his sleep: "The Germans are coming." This time, of course, they come bearing a huge bailout package that might just save Greece from financial disaster. But that has not stopped one magazine putting an image of a swastika hovering over the Acropolis on its cover. Another magazine is distributing a satirical DVD with an obscene picture of German Chancellor Angela Merkel on its cover. Horst Reichenbach, the German-born head of the European taskforce on Greece, is depicted on a newspaper front page in the uniform of a Wehrmacht officer.

Antonis Papagiannidis, a columnist for the Athens-based Businessfile magazine, explained the popular anger with Germany as a response to northern European insensitivity. "The extremely blunt German comments on the Greek impasse, emanating from Chancellor Merkel or (Finance Minister) Wolfgang Schaeuble, down to the sneering gutter press, the building of offensive stereotypes of laziness, or Greek profligacy — all this has awakened deeply rooted resentment on the Greek side," he said. He added that there was also a suspicion about an undeclared agenda. Businessmen report strong German interest in the distress sale of state assets.

Certainly, the German tabloids cut close to the bone last year. The top-selling Bild newspaper branded the Greeks cheats and thieves and called on Athens to sell its islands and the Acropolis to pay debts. This time it has been milder, declaring in almost statesmanlike terms: "Greece needs to leave the eurozone at least for the time being … before the rest of the world writes off Europe because it cannot even resolve the Greek problem."

For many Greeks, the austerity moves seem to be just the beginning of a loss of control over their lives. But Mr Reichenbach and the European Commission cannot understand the fuss because a better functioning Greece is in everyone's best interests. "If you have worked for most of your life outside Germany, comparisons with previous situations seem outside my understanding," said Mr Reichenbach when asked about being called a gauleiter, the Nazi term for a regional governor, in the Greek press.

Bond sale struggles as jitters hit Germany
The Australian
Charles Bremner, Brussels, The Times
Friday, November 25th, 2011

THE euro crisis struck at the core of Europe yesterday, as a German auction of bonds flopped amid weak investor demand. The failed sale of bunds, normally Europe's ultimate safe haven, came as the European Commission clashed with Germany over ways to shore up the euro with tougher budget rules.

EC president Jose Manuel Barroso laid out a contentious program of measures including a requirement for eurozone governments to submit their national budgets to Brussels for approval. The idea was strongly criticised by Angela Merkel, although the German Chancellor's intervention was weakened by signs that the markets were beginning to take fright in her own country. An auction of €6 billion ($8.26bn) of 10-year bunds met only 60 per cent demand. It was the worst-received German bond auction since the launch of the euro and was regarded as an indication that even the biggest economy in the single currency could face pressure from sceptics fearful of a structural collapse.

Mr Barroso presented his package as a remedy to the sovereign debt plague that has spread from Greece over the past 18 months. First would come stronger governance, with states submitting their budget drafts to Brussels for approval or rejection in October of the preceding year. "If we want to keep a common currency, we need more integrated governance," he said. Once the zone's weaker states were forced into new virtue, it would be time to offer guaranteed low-interest money in the form of "stability bonds" — instruments issued by a federal authority and guaranteed by all. Mr Barroso took pains to meet German objections that a flood of cheap bonds would be an invitation to the "sinners of the south" to abandon their path to virtue. "Under the new rules, the commission will have greater surveillance powers, so that we do not face again the situation where failing in one country endangers the stability of the euro area as a whole," he said.

Ms Merkel issued a withering riposte: "I find it extraordinarily inappropriate that the European Commission is suggesting various options for eurobonds today — as if they were saying we can overcome the shortcomings of the currency union's structure by collectivising debt. This is precisely what will not work." She was backed up by the finance ministers of The Netherlands and Austria. Jan Kees De Jager, the Dutch Finance Minister, said eurobonds "are not a magic solution to the current crisis and could even worsen it". Mr Barroso was stung by Ms Merkel's reaction. "I do not think it is appropriate to say from the beginning that the debate should not be held," he said. "We are trying to have a rational, reasonable, serious — intellectually and politically serious — debate."

"If Germany cannot sell bonds, what is the rest of Europe going to do?" asked Benjamin Reitzes, an analyst at BMO Capital Markets.


Extract: Fear of new financial crisis grows as European contagion spreads
Weekend Australian
Matthew Stevens
Saturday, November 26, 2011

THE tentacles of Europe's debt crisis are clutching at the heart of the Australian economy with global credit markets frozen in a "Lehman-style way", triggering warnings from the nation's most senior bankers that a new financial crisis is upon us. "This is fundamentally a European problem and the issue is there is a contagion," ANZ chief executive Mike Smith said yesterday. "There is a credit crunch in Europe now, it is spreading to Asia and it will spread here too."

The primary market and the European interbank markets have "basically come to a stage where there is just no movement", he said. "The interbank market in the US is still open but it is very, very short. But the issue really is that it doesn't matter who you are (in the primary market) there is no bid," he said, identifying the failure of the German bond auction as a pivotal demonstration of the timorous state of investor confidence. "If the German government can't raise money, then no one else can," he said. "The problem is that nobody is prepared to invest.

A senior commercial banker said yesterday that, like the 2008 crisis when Lehman Brothers collapsed, "funding markets have frozen again right now in a post-Lehman style". The direction that is being given by the political classes and the regulators to the European banks is that they have to increase their capital. Their response to that has been to deleverage rather than to raise new capital and thus one of the world's key sources of debt and trade finance has quite suddenly run dry of confidence and capital.

The implications of this potentially secular (generational) shift in the European banking system and the credit markets it has traditionally supported could be seismic around the globe and across an extraordinarily diverse front of global commerce and trade. And this time around, China's need to feed its prosperity might not protect Australia from global financial infection.

Central banks buy some time
The Australian
Scott Murdoch
Friday, December 2nd, 2011

CO-ORDINATED emergency action by global central banks to provide liquidity to frozen credit markets in Europe gave stockmarkets around the world hope that a new global financial crisis will be averted, but it was quickly seen more as an effort to buy some time as European political leaders dither.Six major central banks, led by the US Federal Reserve, the Bank of England and the European Central Bank, revealed they would provide US dollar loans at discounted rates to banks facing stress to keep liquidity alive in the global financial system. Along with the Bank of Japan, the Bank of Canada and the Swiss National Bank, they agreed to cut the cost of borrowing US dollars under swap lines by 0.5 percentage points. The decision helped trigger a 490-point, or 4.2 per cent, rise in the Dow Jones industrial average in New York, the largest one-day gain since March 2009. Wall Street is now up 4 per cent year-to-date.

The positive sentiment flowed through key Asia-Pacific markets, as investors interpreted the central banks' action as a first step to reining in the European crisis. The fresh sense of hope was also helped by news that China would cut bank reserve requirements, effectively freeing up liquidity in the world's fastest-growing economy. It was the first easing of monetary policy conditions since December 2008.

In Australia, the S&P/ASX 200 index rose 108.8 points, or 2.64 per cent, to 4228.6, while the All Ordinaries index gained 103.3 points, or 2.47 per cent, to 4288. The gains added about $35bn to the value of Australian stocks. The Australian dollar also benefited, jumping to $US1.0225, its best level in nearly a month. Tokyo's Nikkei index rose 1.93 per cent while in Hong Kong the Hang Seng index soared more than 5.6 per cent.

However, early futures trading suggested the US market would struggle to hold on to its stellar gains, with the Dow Jones index tipped to open in negative territory overnight. UBS senior equities trader Rob Taubman said investors saw the central banks' emergency liquidity provision as as an effort to ensure a fresh credit crunch did not evolve. "It's definitely a good step in the right direction towards stopping a freeze," Mr Taubman said. "It's a significant co-ordinated approach. Everyone is waiting to see the response in the interbank rates in Europe and the US and whether they fall."

Credit Suisse strategist Atul Lele said the European debt crisis had already taken a toll on world economic growth and the damage would not be reversed by the liquidity injection. The majority of economists have marked down global growth forecasts because Europe is likely to go into recession. The next EU summit on December 9 is seen by markets as vital to breaking the damaging deadlock that threatens the future of Europe. "Prior to this move we had seen interbank funding drying up over the past three months, especially the past two weeks, so what this does is provide some relief to the global banks because they are able to access central banks for funding," Mr Lele said. "It will provide some liquidity in the near term but what it doesn't do is address the solvency of some European nations. A number of them cannot service their debt."

European leaders are working towards a new arrangement to implement bilateral treaties across the eurozone to manage fiscal policy tightening. "If we can get a solution and this (central bank deal) is pre-empting that, then it's great," Mr Lele said. "But it doesn't solve all of the issues."

French President Nicolas Sarkozy at the EU summit in Brussels yesterday said Britain's demands for exemptions were unacceptable. AP
Rescue effort sees UK sidelined
Weekend Australian
Peter Wilson, Europe correspondent
Additional reporting: Agencies
Saturday, December 10th, 2011

EUROPE'S long-awaited rescue plan to restore the credibility of the euro common currency has left Britain more isolated in the 27-nation European Union than at any stage since it signed up 39 years ago.

An EU summit in Brussels that finished this morning may or may not save the struggling currency in the long run, depending on whether its promises of tighter economic integration and extra bailout funds can convince the markets the euro has a future. But what is already certain is that for the first time since Britain joined the European Economic Community in January 1973 it is no longer at the core of the European project, after Prime Minister David Cameron refused to sign up to treaty changes to enforce the new financial rules.

Instead all 26 other EU members will push ahead with a legal framework to enshrine a new "fiscal compact", leaving Britain as the sole member of an outer circle of the EU. Even former British prime minister Margaret Thatcher never allowed her lively disputes with Paris, Brussels and Berlin to reach the point where Britain found itself relegated to a second tier in the union. British diplomats now fear that an inner core of the EU dominated by France and Germany will pursue economic and regulatory reforms at odds with Britain's more free-market approach.

Update European stock markets closed higher on news of the deal. London's FTSE-100 index of top companies was up 0.83 per cent, the Paris CAC-40 jumped 2.48 per cent and the Frankfurt DAX-30 was up 1.91 per cent. Milan soared 3.37 per cent. US stocks also closed on solid gains: the Dow Jones Industrial Average was up 1.55 per cent; the broader S&P 500 jumped 1.69 per cent; and the tech-rich Nasdaq Composite gained 1.94 per cent. The accord, which is to include automatic sanctions that can only be blocked by a majority of powerful states, aims to end past practices of overspending responsible for the two-year debt crisis ravaging Europe. Officials said they would have to iron out complex legal issues posed by an intergovernmental arrangement since the institutions would police budgets. The European Commission and the EU Court of Justice represent all 27 states. In Washington, White House spokesman Jay Carney welcomed developments. "There has been some progress and that's a good thing," he said.

The summit bust-up came when Mr Cameron tried to stare down French President Nicolas Sarkozy and German Chancellor Angela Merkel, telling them he wanted Britain to be part of a 27-nation treaty change but only on condition of concessions to protect the independence of London's lucrative finance industry. Mr Sarkozy and Ms Merkel refused to budge, and when they said they would push on with a new legal compact among the 17 euro nations they were quickly joined by seven of the 10 EU members that do not use the euro. Two others, Sweden and the Czech Republic, also joined a few hours later after saying they first needed to check whether they had parliamentary approval to join the new agreement.

Mr Cameron said his veto of a wholesale change to the EU's main treaty, last revised in 2007, was "a tough decision, but the right one. I had to pursue very doggedly what was in Britain's interests, which is very difficult in a room where people are pressing you to sign up to things because they say it is in all our interests," he said.

Mr Cameron had been urged by Eurosceptic MPs in his Conservative Party to show a "British bulldog spirit" at the summit, with one MP going so far as to warn that taking a weak position would be like Neville Chamberlain appeasing Hitler in the 1930s. Mr Cameron dug in over Britain's preference for light-touch regulation of the banking and finance sector, and its opposition to a financial transactions tax backed by France and Germany. "Where we can't be given safeguards, it is better to be on the outside," Mr Cameron said after rejecting the treaty changes. "Obviously, in terms of financial services, we do have concerns about what the European Commission has been doing, particularly recently. We don't think it's pro-competitive, we think it has been discriminatory."

Mr Cameron's political isolation in Europe was highlighted in the hours leading up to the summit, when he was the only major leader not to attend a conference of the main association of European centre-right political parties. Mr Cameron led the Conservatives out of that group in 2009 in favour of a new Eurosceptic group of more right-wing and nationalist parties.

The summit disappointed market hopes that it would produce a financial "big bazooka" to shore up shaky government bonds in the eurozone but it did achieve some progress that may buy time for the new governments in Greece and Italy to continue to regain the confidence of investors. The new fiscal compact, heavily influenced by Germany, means each nation will submit its budget to the European Commission in advance and there will be fines for countries that spend or borrow too heavily. "General government budgets shall in principle be balanced," the leaders agreed, accepting a new goal that except in extraordinary circumstances no country should run a budget deficit larger than 0.5 per cent of GDP excluding debt and interest payments.

The EU had previously set a deficit ceiling of 3 per cent of GDP but that had often been breached and in future it will be harder to avoid penalties for such breaches. The EU nations agreed to consider lending up to €200 billion to the IMF to help it fight the sovereign debt crisis, with each country given just 10 days to confirm its contribution. They also agreed to speed the creation of a €500 billion ($660bn) bailout fund and to change its rules to allow it to be deployed more quickly and reliably.

The agreement had a lukewarm reception in equity and currency markets but was welcomed by IMF chief Christine Lagarde and European Central Bank president Mario Draghi. "It's going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members," Mr Draghi said. Mr Sarkozy and Ms Merkel were also bullish. "We would have preferred a reform of the treaties among 27," Mr Sarkozy said. "That wasn't possible given the position of our British friends. And so it will be through an intergovernmental treaty of 17, but open to others. "David Cameron asked us — something we all judged unacceptable — for a protocol to be inserted into the treaty granting the United Kingdom a certain number of exonerations on financial services regulations. We could not accept this, since we consider, quite on the contrary, that a part of the world's woes stem from the deregulation of the financial sector."

Extract: Greek restructure to halve debt
The Australian
Charles Forelle, Matina Stevis, The Wall Street Journal
Additional Reporting: Marcus Walker
Thursday, January 12th, 2012

BRUSSELS: Negotiators for banks and governments are working to complete a promised debt restructuring for Greece that will slice in half what the nation owes its private bondholders.

In brief, the problem is that European officials realize they are likely to have only one clean shot at exacting losses from Greece's private creditors. Once that is done, the euro-zone governments will face financing Greece until it is able to borrow again from debt markets, an event that even optimists concede is years away.

Extra aid to Greece is politically toxic in northern euro-zone countries, whose parliaments have expressed exasperation over the spiralling cost. It is stretching the patience of the IMF, which has been a stalwart partner lending to Greece. Greece's original bailout in 2010 was €110 billion. In October, the EU agreed on another €130 billion.

Officials said they hope for an announcement of the structure of the deal by next week, with a formal exchange offer to follow.

For now, the restructuring plan is a "voluntary" bond exchange. Private creditors would turn in their bonds and get new ones that have half the face value and that mature many years in the future.

The head of the Institute of International Finance, which represents creditors, will be in Athens this week. The creditors and the governments are haggling over details of the exchange — most importantly the vital issue of how much interest will be paid on the new bonds. That affects how much cash the governments have to lend Greece so that it can pay it.

By doing the swap, however, Greece loses future leverage. The new bonds will be issued under English law, which provides creditors with substantially more protection. The lion's share of bonds is currently issued under Greek law, which can be changed by the Greek Parliament.

There is another issue. If the plan goes through, at the end of 2014 Greece will have about €435 billion in debt, of which two-thirds will be held by public entities. "It's going to be very hard to force new losses on private creditors," said Mitu Gulati, a law professor at Duke University and an authority on sovereign-debt restructuring. "There won't be enough private creditors next time; the official creditors will also have to take a hit."

On March 20, Greece must repay a €14.5 billion bond — which is money it doesn't have.

Extract: Greek debt talks break down, country heads for March default
The Australian Online
Iain Dey and David Smith, The Sunday Times
Sunday, January 15th, 2012

GREECE is set to default on its debts in 10 weeks, deepening Europe's economic woe and raising new questions over the future of the single currency.

Talks to halve Athens' debts broke down late on Friday. Greece does not have enough cash for a 14.4 billion euros ($A17.65 billion) bond that has to be repaid on March 20. Bankers involved said unless a deal could be salvaged within the next few days, default was "inevitable". A default could lead to Greece breaking away from Europe's single currency, and to a resurrection of the drachma. It would pile market pressure back on to Portugal and Ireland, with traders betting on their eventual exit from the euro. Although European leaders are said to be reluctant to allow Greece to default, they are running out of options.

The collapse of the Greek talks came as Standard & Poor's slashed the credit ratings of nine countries in the eurozone. France and Austria were both stripped of their AAA rating, undermining the financial strength of the European bailout fund created to support Greece, Portugal and Ireland. Italy and Spain had their ratings cut by two notches. Angela Merkel, the German chancellor, said yesterday the downgrades would force Europe to accelerate plans to enforce tighter budget rules on the 17 members of the euro. "We are now challenged to implement the fiscal compact even quicker and to do it resolutely, not to try to soften it," Ms Merkel said.

The Greek debt talks would have seen bondholders agree to write off half of their loans to Athens. They would have received 15 per cent in cash and the remaining 35 per cent in new bonds. The talks fell apart after a row between Greece and the International Monetary Fund over the interest rate on the new bond.

Extract: Winter of our Disconnect
Weekend Australian
Terry McCrann
Saturday, January 21st, 2012

THE new year has started with an extraordinary disconnect between increasing forecasts of global doom and gloom and a surge of optimism in both bond and equity markets. Simply put, the world is possibly — likely? — headed over a cliff. The World Bank warned mid-week of a financial crisis "worse than the GFC" and it sharply cut its 2012 and 2013 economic growth forecasts. Yet bond and equity markets have surged into the new year. Far from a flight to safety, we've seen the very opposite. Global investors seem to have regained an "appetite for risk", precisely when such an appetite would seem to be unwise.

France loses its AAA rating, destabilising not just its own sovereign debt position, but that of any effort to fashion a lifesaving euro rescue anchored on the credit ratings of it and Germany. So what happens apart from some Gallic breastbeating from the man who is soon to be the former president de la republique?

Investors poured into a French one-year bond issue, so the yield dropped to just 0.4 per cent.

That's a financial markets example. The Dax, the German stock exchange index, has leapt 8.8 per cent in just three weeks so far this year. The French CAC is up a more modest but still healthy 5.3 per cent, outpacing the Dow Jones, which has risen 3.3 per cent. That points to a further twist in the puzzle. The US economy, if anything, is actually looking better, defying the northern hemisphere negativity. In the US, the latest sharp drop in new job losses may, and I stress may, finally point to a significant shift in the US jobs market. Plus US corporate profits are looking better, yet the Dow has barely budged.

Now to some extent there is no absolute contradiction. The rush into French bonds, and even to a lesser extent Spanish ones, can be seen as a flight to relative safety. Thanks to central banks and governments, the world is awash with money. It has to go somewhere; there's only so much gold in the world, and indeed even US bonds; and there's a limit to how much you can park under beds. You'd be pretty confident of getting 100c in the euro back from France after 12 months, so the 0.4 per cent you get on the money could be seen as a bonus.

It's also the case that the fundamental disconnect is not total. Greece's 10-year bonds are still yielding 34 per cent and the next cab off the rank, so to speak, Portugal's, are still more than 12 per cent.

One way or the other 2012 is shaping as a fundamentally seminal pivot year.

Greek haircut looms despite fiscal pact
The Australian
Stephen Fidler, Laurence Norman and Matina Stevis, Brussels, The Wall Street Journal
Wednesday, February 1st, 2012

LEADERS of 25 European Union governments agreed yesterday on what some billed as a historic pact to move to closer fiscal union and signed off on the details of a permanent bailout fund for the eurozone — yet Greece's looming debt restructuring threw a shadow over the summit. The leaders discussed Greece but gave no more clarity on the eventual outcome of an issue that was yesterday creating growing nervousness in financial markets. In a joint statement, the EU leaders noted "tentative signs" of economic stabilisation in Europe but said financial market tensions continued to weigh on the economy. The final shape of the deal to reduce Greece's debt is still unknown after months of wrangling between the Greek government, representatives of bondholders, and officials from the EU, the International Monetary Fund and the European Central Bank.

Senior officials said they expected a debt-restructuring accord in "coming days", in time to launch a bond-exchange offer to private investors in the middle of this month. One question the summit did not address: whether official creditors, such as the ECB, would be needed to reduce Greece's debt to levels that it was likely to be able to sustain in the long term. After the summit, Greek Prime Minister Lucas Papademos met other senior European officials, including Jorg Asmussen, the German representative on the board of the ECB. Officials said the talks concerned conditions to be imposed on Greece so it could receive its new loans. Luxembourg Prime Minister Jean-Claude Juncker said the meeting yielded no conclusions. Mr Papademos said Greece would continue talks with private-sector creditors this week to reach a deal that would not require more financing from official lenders. "It's hard to predetermine if we will need additional financial support. Our intention is to avoid it," he said.

Banks that hold Greek bonds amounting to €206 billion ($255bn) are in talks with Athens to slash the amount by half through a bond swap. The uncertainty about the debt agreement — and whether it will be forced on unwilling bondholders — is raising questions particularly about Portugal, whose €78bn bailout agreed upon last year now looks inadequate to some investors. Portugal Prime Minister Pedro Passos Coelho said holders of Portuguese bonds would never face the write-offs that would be suffered by investors in Greece. "Portugal's debt is perfectly sustainable," he said after the meeting.

The fiscal pact agreed upon yesterday is a German-sponsored treaty among the 17 eurozone nations and eight other EU countries that imposes tighter budget discipline on euro members and is aimed at preventing a repeat of the Greek debt disaster. Britain and the Czech Republic were the only two EU countries not to join. "Considering the timeframe, this was a real masterpiece," German Chancellor Angela Merkel said.

While the euro members share a central bank and monetary policy, absence of strong budget coordination has contributed to the crisis. The leaders agreed that the European Court of Justice would be empowered to fine euro countries running excessive deficits. Fines will be capped at 0.1 per cent of gross domestic product. For Italy, for example, that could mean fines as high as $US2bn ($1.8bn). It will require governments to keep their budget deficits to an average of 0.5 per cent of GDP over the economic cycle — and to limit total government debt to 60 per cent of GDP over time. The EU has long-standing rules supposed to limit budget deficits in any year to 3 per cent of GDP, and limiting government debt to 60 per cent of GDP, but they have never been enforced.

Some analysts said the pact failed to address the crisis or capture the problem of private debt, which lay at the root of the economic travails of countries such as Ireland and Spain. They questioned whether it made sense to impose big fines on governments struggling with budget shortfalls. The pact "offers little in the way of economic substance and does nothing to tackle the problems at hand", said Sony Kapoor, managing director of Re-Define think tank. Its purpose was "to assure sceptical German voters and the ECB that troubled euro countries would be fiscally virtuous".

A protester kicks a tear gas canister as clashes erupted on the sidelines of a protest against new austerity cuts. AFP
Greek cabinet approves austerity measures, parliament to vote
The Australian Online
Nektaria Stamouli and Matina Stevis, Dow Jones Newswires
Additional reporting: Alkman Granitsas
Saturday, February 11th, 2012

GREECE'S cabinet has unanimously approved the painful reform measures the country must take to secure a new euros 130 billion bailout from its international creditors, a senior government official said this morning. "We've approved it," the official said after a four-hour meeting of the cabinet. The approval comes just hours after the caretaker government of Prime Minister Lucas Papademos lost the support of a junior partner in the coalition government and amid growing opposition to the new measures from other lawmakers and unions.

Greece's parliament must now also approve the package of measures before the country's European partners and the International Monetary Fund will unlock the new aid program, which also calls for a massive €100bn debt writedown. That vote has been set for tomorrow.

Overnight, the small, nationalist Laos party — which along with the Socialist party and the conservative New Democracy party make up the coalition — effectively withdrew from the government with four party officials resigning from the cabinet. The Laos party controls just 16 seats in Greece's 300-member parliament. Even without its support, the two main coalition partners have a combined 236 seat majority. According to a second government official, Mr Papademos will announce a cabinet reshuffle tomorrow to replace the departing officials.

In October last year, Greece's European partners and the International Monetary Fund promised a fresh bailout to the country to cover its financing needs through 2015. They have also demanded, as a precondition for that loan, Greece's private-sector creditors write down €100bn of the country's debt. According to one cabinet official leaving the meeting, the European Central Bank, which holds tens of billions of euros of Greek debt, will also indirectly participate in the debt-swap plan.

Graffiti daubed on the wall of the Bank of Greece headquarters in Athens that reads 'Rob to get money'. AFP
EU purse stays shut till Athens proves fit
The Australian
AP, The Times, AFP
Wednesday, February 15th, 2012

BRUSSELS: Greece faces further hurdles and delays before it receives a second €130 billion ($160bn) bailout despite its legislators voting through more austerity measures in the face of violent protests. EU Economic Affairs Commissioner Olli Rehn called the Greek parliament's approval of a further round of budget cuts a "crucial step forward", but Germany insisted yesterday that it would still take some time before the second bailout was delivered.

As residents cleaned the streets of Athens following a weekend of destruction, Germany, which as Europe's biggest economy pays the largest part in bailout deals, said it would not give its final approval for the new aid payments until early next month — after it becomes clear how many banks and investment funds are willing to take losses on their Greek bonds and the parliament in Berlin votes on the new measures. Pushing the bailout back for several weeks underlined the distrust that has built up against Greece over the past two years as many promised cuts and reforms have been passed in its parliament, but never implemented.

The uncertainty over EU financial reforms and the region's weak economic outlook led Moody's Investor Service to downgrade credit ratings for Italy, Portugal and Spain while lowering the outlook for France, Britain and Austria from "stable" to "negative". "Germany is trying to get the best deal it can by putting pressure on Greece now," said Ben May, European economist at Capital Economics in London. The idea is to "give Greece a bit more of an incentive over the next few weeks to speed things up and get things moving".

Delaying final approval of the bailout is not without risk. Uncertainty over the rescue money could dissuade some of Greece's private investors from participating in a separate bond-swap deal, Mr May warned. A hitch in getting the bailout package through national parliaments in the eurozone could also push Greece perilously close to missing a €14.5bn bond redemption due on March 20, he added. German Finance Minister Wolfgang Schaeuble stressed that Europe was doing everything to help Greece avoid bankruptcy, "but Greece itself of course must want that". He told German public broadcaster ZDF that if Greece were to default on its debt Europe "is better prepared now than two years ago" to deal with it.

Greece's political leaders scrambled over the weekend to get new far-reaching austerity measures through parliament ahead of a meeting of the finance ministers from the 17 eurozone nations tonight. Luxembourg's Finance Minister, Luc Frieden, said yesterday that if Athens failed to implement its reform promises the eurozone group would have to go on without Greece. "Our preferred scenario is Greece complying, the eurozone giving additional funds and — I cannot insist enough on this aspect — clear monitoring of the implementation of what Greece has promised to do," Mr Frieden said in Washington. "If they don't do all this I think then we must go on with 16 countries."

Francois Hollande, the French Socialist Party candidate tipped to become the next president, yesterday raised the prospect of Greece's temporary exit from the euro and promised to rewrite the new German-inspired EU fiscal treaty to soften its austerity. Mr Hollande, polling far ahead of President Nicolas Sarkozy for the election in less than 10 weeks, sketched his unGermanic vision for the single currency as Berlin insisted that it had no intention of "torturing" the Greeks. Mr Hollande has angered German Chancellor Angela Merkel by refusing, if elected, to ratify the fiscal treaty without revisions dictated by his centre-left government. Setting out his terms to journalists, he called the eurozone rescue of Greece a failure.

Greeks push to seal latest debt deal ahead of poll
The Australian
Additional reporting: AP
Thursday, February 23rd, 2012

ATHENS: Greece has rushed to finalise legislation tied to the huge eurozone bailout, with officials warning tough reforms mean a heavy workload and controversial constitutional changes. The program has to go through as the country prepares for elections in April, which pollsters say could fail to produce a clear majority, clouding prospects for later implementation of the accord.

Eurozone finance ministers sealed the unprecedented deal on Tuesday to provide a new bailout package ultimately valued at €237 billion ($295bn) to keep Greece in the single currency. Parliament will vote tonight on legislation to implement the deal, including a private creditor debt writedown. The rescue package should be enough to avert a default on March 20 by enabling Greece to repay maturing debt worth €14.43bn.

"We have only a few days ahead of us until the European Union summit (March 1-2) … and we must do a lot of things in these few days. We must complete all the prior actions," Finance Minister Evangelos Venizelos said. "Greece will remain a eurozone member, no matter what." A finance ministry source said the debt swap would be held on March 12 and the government hoped to get at least 66 per cent of private creditors to sign up to the deal. It could then impose a collective action clause to force any hold-outs to accept it too, making sure it could go through in full.

As the leaders of the coalition backing Greek Prime Minister Lucas Papademos's cabinet praised the deal as "satisfactory", others gave it a hostile reception. Unions called for new protests overnight as the head of the opposition Communist Party vowed to fight the new austerity reforms. "We insist on daily struggle to thwart the measures," party chief Aleka Papariga said.

Greeks were torn between relief and foreboding. While the aid will protect them from a calamitous default and keep them in the euro bloc, it will also cost households years of economic hardship. "I don't see (the agreement) with any joy because again we're being burdened with loans, loans, loans, with no end in sight," Athens architect Valia Rokou said. Some in Athens noted that the rescue deals lightened the immediate financial uncertainty looming over the country. Ta Nea newspaper said in an editorial: "It's not every day that €100bn in public debt is written off, or loans for €130bn agreed. There will be new sacrifices and difficulties, particularly for middle and lower earners. We must hope that this new period will become an opportunity for growth."

Extract: Greek debt rocks stockmarket
The Australian Online
Sarah Turner, Marketwatch
Wednesday, March 7th, 2012

SHARES fell deep into the red today as concern built about a Greek default, adding to fear about the health of the world economy. The benchmark S&P/ASX200 index was down 61 points, or 1.45 per cent, at 4143.7, bringing week-to-date losses to 3 per cent. The index hasn’t closed at this level since January 9. The broader All Ordinaries index was down 61.1 points (1.42 per cent) at 4234.4. The Australian dollar traded at $US1.0531, after falling to a one-month low overnight.

This week has seen the release of some uninspiring data releases from across the globe, including Monday’s downgrade to China’s economic growth target. The stage was set for losses in Australia after European and US stockmarkets tumbled overnight; the Dow Industrials dropped 204 points by the close for its worst day so far this year. Oil fell to a two-week low in New York while gold futures dropped to their lowest level for six weeks.

Those moves followed reports of a warning from the Institute of International Finance that the costs for the eurozone related to a disorderly default on Greek government debt could exceed €1 trillion ($1.24 trillion). Concerns over the level of private sector participation in Greece’s bond swap have grown in recent days ahead of tomorrow’s deadline for the exchange. The bond swap is an integral part of fresh aid package recently agreed between Greece and its institutional lenders that was designed to head off default.

“The potential for an unintended political outcome in Europe remains high,” said Mark Burgess, chief investment officer at asset manager Threadneedle Investments. Other Asia-Pacific equity markets were also in the red today, with Hong Kong’s Hang Seng Index down 0.9 per cent and Japan’s Nikkei Stock Average down 0.7 per cent.

Eurozone countries approve 130-billion-euro second bailout for Greece
The Australian Online
Matina Stevis, Dow Jones Newswires
Additional reporting: Stelios Bouras, Nektaria Stamouli, Emese Bartha and Nick Cawley
Thursday, March 15th, 2012

THE eurozone countries overnight finally signed-off on Greece's second bailout program, ending a protracted and dramatic negotiating process that started last July. The hope is that the €130 billion ($162.1 billion) package, funded mostly by eurozone countries as well as the International Monetary Fund (IMF), will be enough to keep Greece funded until 2014-2015. But talk of a third Greek bailout has already started with the ink still wet on the second one, especially following a report by European Union (EU) experts highlighting the risks to structural-reform implementation and predicting "at best stagnation" for 2013. Greece has been in a recession for five consecutive years.

A statement from Jean-Claude Juncker, chairman of the Eurogroup of eurozone finance ministers said that "euro area member states have today formally approved the second adjustment program for Greece" and added that "all required national and parliamentary procedures have been finalised". Since negotiations to secure the fresh funding started last summer, Greece has gone through one of the most tumultuous periods in its modern history, seeing its prime minister step down and get replaced by an unelected former central banker. With snap elections coming up, most likely in late April or in May, it is difficult to draw a line under Greece's sovereign-debt crisis after securing the new aid.

It also said the 17 countries had authorized the transitional eurozone rescue fund, the European Financial Stability Facility, to release the first instalment of Greece's bailout. The first installment will be "for a total amount of €39.4 billion, which will be disbursed in several tranches," the statement said. The announcement formalised a political decision to grant Greece a fresh €130 billion package taken at a euro-area finance ministers' meeting Monday in Brussels.

Mr Juncker expressed the conviction that the program would "allow the Greek economy to return to a sustainable path, which is in the interest of everyone", and called on Greece to remain committed to the structural reforms and fiscal targets set as conditions for the aid. He called the second bailout a "unique opportunity for Greece that should not be missed". "The Greek authorities should … continue demonstrating strong commitment and to keep up the implementation momentum by rigorously pursuing the adjustment effort in the areas of fiscal consolidation, structural reforms and privatisation, strictly in line with the new program," Mr Juncker's announcement said.

Discussions to add fresh eurozone and International Monetary Fund cash to Greece's first bailout approved in May 2010 had started in July 2011 but it took months of talks to finalise it. A crucial prerequisite for Greece's second program was an unprecedented debt restructuring of €206 billion worth of bonds held by private-sector investors. The nominal value of their holdings was more than halved and their repayment period extended. The biggest chunk of the restructuring was settled Monday through a bond swap. Holders of foreign-law Greek government bonds are set to settle their bond swap in early April. Eurozone deputy finance ministers held a teleconference earlier yesterday to finalise details of the program and ensure that all national and parliamentary procedures to ratify it had been completed in the common-currency nations.

Greek finance minister Evangelos Venizelos, who oversaw the country’s delicate debt negotiations, said overnight that he will step down from his position once formally elected to lead the country's Socialists on Sunday. According to a transcript of his comments in a television interview with privately owned television station Alpha, Mr Venizelos said discussions have been held on his replacement but stopped short of saying when exactly he will step down and who his replacement might be. "I cannot continue to play a double role. Once I take on my duties as the head of the biggest party in this parliament, I will have to dedicate myself to these duties," he said.

Meanwhile, Italy's successful government bond sale overnight added new evidence that investors have begun to give Italy better chances of avoiding a fiscal crisis than Spain, another big eurozone economy that has been seen at risk of needing a Greek-style bailout. Italy comfortably sold the maximum targeted €6 billion in government bonds with maturities of three and seven years. It also did so at lower cost, with the yields on both bonds falling significantly from previous auctions of similar maturities.

IMF okays a further $35bn for Greece
The Australian
Additional reporting: AP, The Times
Friday, March 16th, 2012

WASHINGTON: The International Monetary Fund's board was expected to meet overnight to set a new €28 billion ($35bn) loan for Greece that was kept secret until the eurozone nailed down the bailout program for the country. Despite some misgivings among members over the IMF pouring more money into troubled Greece and Europe, and worries that Greece's fractious politics might impede progress in restructuring its finances, the loan program was expected to pass — a day after the eurozone signed off on the bailout.

After keeping its plans secret for weeks until the EU and Athens could complete the €107bn private sector debt writeoff, last Friday IMF chief Christine Lagarde announced a larger than expected €28bn proposal. The loan was expected to span four years rather than the normal three years for the IMF's standard extended fund facility.

The IMF was disappointed by Greece's progress under its previous €30bn loan, part of a huge IMF-EU bailout that failed to get the country's finances on a sustainable path. The IMF disbursed €20.3bn of that loan. The rest has been cancelled to make way for the new loan program.

Despite the huge assistance packages, Greece is expected to have a tough time returning the economy to growth. The latest assessment by the so-called troika — the EU's executive commission, the European Central Bank and the IMF — indicates that Greece will have to make strenuous efforts to reform its economy and clean up its budget if the aid program is to succeed. The report says Greece's economy, now in its fifth year of recession, will recover more slowly than expected and will stagnate next year, with growth expected to return only in 2014.

Antonis Samaras, the leader of Greece's conservative New Democracy Party, called yesterday for a 15 per cent corporate tax and the outsourcing of tax collection as he presented his plans for overcoming the crisis. "We will go for a corporate flat rate tax of 15 per cent, but at the same time we have to make sure there are no crooks in the system," he said. "If necessary, we will get … companies like KPMG to help collect taxes," said Mr Samaras, whose party holds a commanding lead with an early election expected next month. "We'll also try to make public employees more competitive," he said.

Mr Samaras said his party would abide by the economic policies agreed as part of the €130bn bailout. "But we are also asking for certain growth-oriented modifications … recovery measures … to stop the recession cycle," he said. Mr Samaras has repeatedly said the policies do not focus sufficiently on ending the contraction of the Greek economy that is nearing 20 per cent since the crisis began in 2008.

Wage cuts demanded by international creditors should begin to make Greece competitive again, and a lowering of the corporate tax rate from 25 per cent could lure companies to set up operations. Ireland's 12.5 per cent corporate tax rate has been viewed as having helped the country attract companies. Tax evasion and corruption have also been seen as major problems the Greek government must overcome to stabilise its finances.

Meanwhile, a second credit rating agency has given Britain a formal warning that it could lose its AAA rating because of the government's high levels of debt. Fitch said it was putting Britain on "negative outlook" until at least 2014 as it argued that a renewed crisis in the eurozone or lower than predicted growth could undermine the AAA rating. The decision is embarrassing for the government, coming the week before the budget and the day after Chancellor George Osborne suggested Britain's finances were so stable that the government could issue 100-year bonds. Moody's Investor Services took a similar view a month ago.

Extract: Austerity budget bid claims another leader
The Australian
Marcus Walker and Charles Forelle, The Wall Street Journal
Wednesday, April 25th, 2012

The Dutch government has fallen amid a dispute over budget cuts, underscoring the growing difficulty Europe's leaders face against a darkening economic picture, massive debts, angry voters and volatile financial markets.

On Monday, Dutch Prime Minister Mark Rutte became the latest eurozone leader to fall victim to the region's economic woes, tendering his resignation after failing to win enough backing in parliament for measures to cut the country's budget deficit. A divide is growing between a German-led camp that argues there is no alternative to austerity for all, and critics who say the strategy is pushing the eurozone into a downward spiral.

Under Mr. Rutte, the Netherlands was one of Berlin's staunchest allies, along with Finland, in imposing fiscal rigour on Europe's south. The Dutch election, expected this northern summer, could put that in doubt.

Leading the critics is Francois Hollande, the Socialist challenger favoured to unseat French President Nicolas Sarkozy on May 6 after the two men emerged as the leading candidates in Sunday's first round of elections. Mr Hollande has vowed to renegotiate the eurozone's German-inspired fiscal pact to make it more growth-friendly.

If Mr Hollande wins, he could face a battle with German Chancellor Angela Merkel, who opposes any relaxation of fiscal discipline. "If France changes the direction of the European construction, if France brings back growth, economic activity, sustainable development, big environmental infrastructure, then Europe will recover and we'll be done with this austerity that is imposed everywhere and which ends up taking hope away from the people and leading them to vote for the far right," Mr. Hollande said.

Greece also holds elections on May 6. Voters are expected to punish their established political parties heavily for the country's deepening economic depression, adding to the country's political instability. Parties that support the international bailout plan for Greece, which requires further draconian austerity measures by June, are expected to cling on to power, but only just.

Many investors are increasingly doubtful about the austerity-for-all mantra emanating from Berlin and the European Central Bank. On Monday, financial markets were more worried about disappointing data on growth than by Holland or Mr Hollande, analysts said. The balancing act is especially hard in Spain, where the central bank said Monday that the economy contracted at an annualized pace of around 1.5% in the first quarter.

Same day Extract: Private sector stalls as region braces for double dip — Ilona Billington

LONDON: The eurozone's private sector contracted in April at the sharpest pace since November, damaged by a steep decline in the manufacturing sector, suggesting the region won't rebound quickly from the recession recent data are pointing to. And, with new orders falling, input prices rising and firms cutting jobs as confidence weakens, the second part of the likely double-dip recession may be as debilitating as the first. The eurozone emerged from the latest recession in the third quarter of 2009.

Greek political uncertainty creates financial volatility across Europe
The Australian Online
Tuesday, May 8th, 2012

GREECE is sinking deeper into a political and financial morass as initial efforts to form a new coalition government have failed after no party won a clear majority in a parliamentary election.

The result of Sunday's election raised troubling new questions about Greece's ability to stay solvent and in the euro currency bloc. And the political impasse means Greece could face another round of elections next month. Voters hammered the conservative New Democracy and socialist Pasok, the two parties that had signed up to the country's multibillion dollar bailouts. The result was a clear anti-austerity message. Smaller parties that had rejected the draconian terms of Greece's rescue packages made significant gains, raising the possibility that they might push the country out of the euro. They included the extremist Golden Dawn party, which has been blamed for violent attacks against immigrants. The party won 21 seats in the 300-member parliament, and nearly seven per cent of the vote.

No party won nearly enough votes to form a government, leaving a coalition government or new elections as the only options. New Democracy's Antonis Samaras, who came in first with only 18.8 per cent of the vote and 108 seats, failed to build a coalition and handed back the mandate to the president. "We did everything possible," Mr Samaras said in a televised address. "We directed our proposal to all the parties that could have participated in such an effort, but they either directly rejected their participation, or they set as a condition the participation of others who, however, did not accept."

The uncertainty caused huge volatility in financial markets across Europe. The Athens exchange closed 6.7 per cent down. Greece's bailout creditors appeared alarmed, stressing Athens must stick to its commitments. "Of course the most important thing is that the programs we agreed with Greece are continued," said German Chancellor Angela Merkel. Her remarks were echoed by a European Commission spokesman, Amadeu Altafaj Tardio, who stressed the need for "full and timely implementation" of Greece's agreement with its international creditors and underlined that "solidarity is a two-way street".

Now that Samaras has failed to create a government, the mandate goes to Alexis Tsipras, the 38-year-old head of the Radical Left Coalition, or Syriza, who came in second with 16.78 per cent and 52 seats. Mr Tsipras will officially be asked to seek coalition partners and will have three days to clinch a deal before the mandate passes to former finance minister and Pasok head Evangelos Venizelos. If no agreement can be found, new elections will be called, probably for June.

The timing is critical. Greece has to introduce new drastic austerity measures worth 14.5 billion euros ($A18.7 billion) for 2013-14 in June. The country is also due to receive a 30 billion euros instalment of its rescue loans from the other countries in the 17-strong eurozone and the International Monetary Fund. If rescue loan funding is cut off, the country will find itself unable to pay salaries and pensions, and could face defaulting on its debts and potentially leaving the euro.

The leader of the Radical Left coalition, Alexis Tsipras, leaves the presidential palce in Athens
after a meeting with Greek President Carolos Papoulias. AFP
Syriza leader Tsipras gambles that EU cannot afford Greek exit
The Australian Online
James Bone, The Times
Additional reporting: Geoffrey T. Smith and Costas Paris
Tuesday, May 15th, 2012

THE new left-wing star of Greek politics is gambling that the European Union cannot afford to kick Greece out of the euro. Alexis Tsipras of the Radical Left Coalition (Syriza), which took a surprise second place in the May 6 election and is expected to win a rerun, wants to rip up the harsh terms of Greece's international bailout agreement while remaining in the common currency.

After a week of high drama, Mr Tsipras refused again last night to join a power-sharing government with pro-bailout parties, accusing them of wanting to implement a "criminal" agreement. Syriza brushed off threats by European policymakers that Greece will be forced from the euro if it reneges on the bailout deal. "We really believe that at this moment a possible exit of the Greek economy from the eurozone would have a very, very big cost for the eurozone as a whole," Gabriel Sakellaridis, Syriza's economic coordinator, told The Times overnight. We have a Plan B and we have a Plan C as well, but we believe in our Plan A," he said. "We believe that if we have a negotiation we will win some things, because it's very difficult for them to throw us out of the eurozone."

The deadlock has plunged the eurozone into renewed crisis, with Greece heading towards a rerun election next month that could bring Mr Tsipras and his anti-bailout party to power. Polls show that Syriza, which trebled its vote to 16.8 per cent in the election, would win as much as 27.7 per cent in a new vote. The winning party is allocated a 50-seat bonus, giving Syriza up to 128 seats in the 300-seat Parliament — almost certainly enough to assemble an anti-bailout coalition government.

Mr Tsipras, 38, who trained as a civil engineer, is a former communist youth activist who took part in the landmark anti-globalisation protests at the G8 summit in Genoa, Italy, in 2001. He made his name organising sit-ins and demonstrations at his high school and Athens Polytechnic university, where he defected from the orthodox Communist Party to the more pro-European leftist group Synaspismos. He burst on to the national political scene in 2006 at the age of 32 when he managed to win 11 per cent of the vote in an effort to become mayor of Athens. Two years later, the party chief at the time, Alekos Alavanos, handed over the leadership of Synaspismos to him in a deliberate effort to cultivate younger supporters. Soon after assuming command, he provoked controversy by refusing to condemn riots in response to the shooting of a 15-year-old boy by police.

Mr Tsipras is part of the anti-globalisation generation which wants to remake the world economic system. Married to a fellow civil engineer, with whom he has one child and is expecting another, he rides a motorcycle and never wears a tie. When President Papoulias summoned party leaders to coalition talks, most of those present were old enough to be Mr Tsipras's father.

Syriza is a coalition of 11 leftist groups, ranging from Greens to communists. Its manifesto calls for Greece to leave Nato. "It's the equivalent of a New Left party in European terms," said Iannis Konstantinidis, a politics professor at the University of Macedonia in Thessaloniki. Mr Tsipras's youthful good looks have caught Greece's eye as the nation tries to purge the political dinosaurs blamed by many for the economic collapse. Syriza's main appeal, however, is its message: that it is possible to remain in the euro without pursuing the austerity programme demanded by Europe.

The party wants a debt moratorium for three to five years so that it can spend bailout funds on promoting jobs and growth. "If they halt the bailout flow, we can stop, on our side, paying the interest," Mr Sakellaridis said. "It will be a period of negotiations. We will try to find some way to pay wages and pensions. We do not promise people that wages and pensions will return to the levels of before the crisis. What we say is we need people to stand up with us. That increases our bargaining power."

The pro-bailout parties New Democracy and Pan-Hellenic Socialist Movement (Pasok), which together were two seats short of a majority in the election, have sought to enlist support from the small, centre-Left Democratic Left. But this offshoot of Syriza, created when four MPs walked out of the party in 2010, has insisted that it will not join a coalition unless Syriza is also part of it.

Mr Tsipras has been heavily criticised by other party leaders for failing to join a power-sharing government. Antonis Samaras, the head of the conservative New Democracy, accused him of arrogance. Evangelos Venizelos, the Pasok boss, said that he was not ready for the responsibilities of power. Even Mr Alavanos published a piece demanding that Syriza tell the truth to voters: that renouncing the bailout meant an exit from the euro.

But Mr Tsipras is sticking to his guns. "Judging from the way he is behaving in this last week, he looks very much into professional politics," Mr Konstantinidis, the politics professor, said. "They were quick to realise that the anti-bailout memorandum vote would be the dominant factor. They are afraid they will lose touch with the anti-bailout vote." Greece’s President Karolos Papoulias will meet again with the country's political party leaders tonight, after proposing a coalition government made up of technocrats in a bid to end the country's political deadlock.

Meanwhile, the 17 finance ministers of the eurozone didn't discuss any possibility of Greece leaving Europe's currency union at their meeting last night, group chairman Jean-Claude Juncker said. "There is an unshakeable desire to keep Greece in the euro zone," Mr Juncker told a joint briefing after what appeared to be a generally inconclusive meeting. "The exit of Greece from the euro zone was not the subject of our discussions today," Mr Juncker said. "Absolutely no one has argued for that position."

However, officials close to the talks suggested that Mr Juncker had been stretching semantics, saying there had indeed been such a discussion, but that no-one had supported a Greek exit. "They definitely talked about it … to check that everyone was on the same page," said a senior EU official close to the talks, indicating that the issue was raised with all ministers present.

But Mr Juncker warned his colleagues against "lecturing" Greece on its duties. "I don't like the way of threatening Greece day after day: this isn't the way of dealing with partners, colleagues, friends and citizens," Mr Juncker said.

Lecturing had been the order of the day as the ministers arrived for last night’s meeting, with Austria's Maria Fekter declaring that "Greeks must be clear that the situation is serious and that political pettifogging is out of place here". Appearing with Mr Juncker later, European Economic and Monetary Affairs Commissioner Olli Rehn said that Greece was the only one of three countries currently in aid programs that had failed to make economic progress. He said the reasons for its failure have been largely homegrown, citing "a lack of political and weak administrative capacity". Mr Rehn was more upbeat about Spain, which he praised for its actions to shore up its banking system, and about the process of budget deficit reduction in some of the eurozone's less publicized problem countries, Slovenia and Cyprus.

Last night’s meeting was prevented in part from taking any political decisions by the fact that the incoming French President Francois Hollande has not taken office yet nor named a finance minister. France was instead represented by a senior treasury official.

Greece will decide tomorrow whether to redeem around €450 million ($579.5 million) in bonds still held by private investors who refused the country's debt-swap offer earlier in the year.

Eurozone 'ready for life after Greece'
The Australian Online
Sam Fleming and Sam Coates, The Times
Wednesday, May 16th, 2012

GREECE has been served notice that the euro can survive without it as Athens prepared for another general election that could end the country's membership of the single currency. Europe must prepare for Greece to return to the drachma if voters return a left-wing government bent on ripping up the terms of the country's international bailout, politicians warned. Christine Lagarde, the managing director of the International Monetary Fund, said that the eurozone needed to be “technically prepared for anything” while warning that a Greek exit could be “quite messy”. Ben Knapen, the Dutch Minister for Europe, said that the eurozone was ready to survive a Greek exit and that there was no scope to water down the country's austerity plans.

Their comments came as last-ditch coalition talks collapsed in Athens, paving the way for an election on June 10 or 17. If Greece reneges on the rescue terms, its lifeline from official creditors is likely to be severed, forcing it to dump the euro. Adding to the political drama, an aircraft carrying President Francois Hollande of France to Berlin was forced to turn back after a lightning strike. Mr Hollande switched to another aircraft to make the journey to attend talks with Angela Merkel aimed at resetting France's relationship with Germany.

The euro slid to a four-month low against the dollar as figures showed that the eurozone narrowly avoided recession in the first quarter of the year. Greece's economy shrank by 6.2 per cent in the first quarter of 2012, and in Athens political leaders were warned of a run on banks amid rising public fears that euros could be forcibly exchanged for drachma. Mrs Lagarde said that the IMF hoped Greece does not quit the euro, adding: “We have to be … prepared for anything. You have consequences on growth, you have consequences on trade, and you have consequences on financial markets … You can certainly assume it would be quite messy.”

Speaking in London, Mr Knapen said that there was no prospect of easing the terms of Greece's 130 billion euros bailout. And he contrasted Greece with periphery members Italy, Spain, Ireland and Portugal, which have been making intensive efforts to reform. Coupled with attempts to boost the region's “firewall” to 700 billion euros to 800 billion and an overhaul of European governance, the reforms mean that the eurozone would be resilient in the face of a Greek exit, he added. “A lot of things have changed if you compare with a year, a year and a half ago. That makes me rather confident that the spillover effect is something we will be able to manage and control,” he said. Greece, he argued, is now an issue that “stands for itself”.

Such a sanguine message was questioned by many analysts, who fear that a Greek exit could trigger a contagious loss of confidence in other periphery nations that tests the euro's defences to the limit. The return to the ballot box so soon after the inconclusive May 6 election has created unpredictable new perils for Europe, with President Karolos Papoulias privately warning politicians of a possible run on Greek banks. The new election will paralyse Greece at a time when it is meant to be agreeing 11.5 billion euros of new spending cuts in order to receive further tranches of bailout money.

Political analysts suggested that the anti-bailout leftists could face a backlash at the polls after their refusal to join a coalition. “This is our last chance for a responsible government to be formed,” Iannis Konstantinidis, a politics professor at the University of Macedonia in Thessaloniki, said. “I think people are going to weigh that quite heavily.”

Speaking at his inauguration speech yesterday, Mr Hollande promised to push back against a European budget-cutting pact championed by Mrs Merkel and his predecessor, Nicolas Sarkozy, as he argued against excessive austerity. “To overcome the crisis that is hitting it, Europe needs plans. It needs solidarity. It needs growth. To our partners, I will propose a new pact that will tie the necessary reduction of public debt with the indispensable stimulus of the economy,” Mr Hollande said.

But behind the scenes French and German officials have been working to hammer out a shared agenda, which is likely to see the current fiscal pact remaining untouched and limited additional spending by diverting existing European structural funds.

Extract: A senior judge has been named interim Prime Minister in Greece until the next elections
The Australian Online
Thursday, May 17th, 2012

A SENIOR judge has been sworn in to head Greece's caretaker government for a month as the debt-crippled country lurches towards new elections. The political uncertainty is worrying Greece's international creditors as well as Greeks themselves, who have withdrawn hundreds of millions of euros from banks since the May 6 election.

Council of State head Panagiotis Pikrammenos, 67, was appointed yesterday to head a government that will lack the mandate to make any binding commitments until a new election, which is expected June 17. About 700 million euro ($A897 million) in deposits have left Greek banks since May 7, the day after the election, President Karolos Papoulias told party leaders after being briefed by central bank governor George Provopoulos. "The situation in the banks is very difficult," Mr Papoulias said according to a transcript of the meeting's minutes released Tuesday night. "Mr Provopoulos told me that of course there is no panic, but there is great fear which could turn into panic."

There were no queues at banks in Athens after the May 6 election, but Greeks have been gradually withdrawing their savings over the past two years as the country's financial crisis deepened, either sending the money abroad or keeping it in their homes. Despite the country's financial situation, households and businesses still had 165 billion euro deposited in local banks in March, the last month for which Bank of Greece figures are available, compared to about 237 billion euro before the crisis broke in late 2009.

"In a democracy, new elections are the natural consequence of the impossibility of forming a government following an election. It will now be for the Greek people to take a fully informed decision on the alternatives, having in mind that this will be indeed an historic election," said European Commission President Jose Manuel Barroso. "We will of course respect the democratic decision of the Greek people," he added. "At the same time, Greek citizens should be aware that there are 16 other democracies in the euro area."

Greece is being kept afloat by bailout loans from other eurozone countries and the International Monetary Fund, and losing them would lead to state coffers running out of money, including for pensions, health care and salaries. It is unclear how the June election will affect the continued disbursement of the loan installments. "The Greek people need to know what they are voting for," German Foreign Minister Guido Westerwelle said yesterday. "Namely not about party politics but about the future of Greece in Europe and the euro. We hope and expect at the same time that all decision-makers in Greece are now aware of their responsibility. Chancellor Angela Merkel's spokesman, Steffen Seibert, said Germany's wish was that "a Greek government which is capable of acting emerges as soon as possible from these elections." The spokesman would not comment on the bailout money due Greece at the end of June.

The instability has led to questions about Greece's prospects of remaining in the euro. "If the country's budgetary commitments are not honored, there needs to be appropriate revisions, which means either supplementary financing and additional time, or mechanisms for an exit, which in this case must be orderly," IMF head Christine Lagarde said on France 24 television. Greece leaving the euro "is something that would be extremely expensive and would pose great risks, but it is part of the options that we must technically consider."

Greece now faces a month of inertia, with a government hamstrung by party leaders' insistence that it can take no binding decisions. Alexis Tsipras, head of the Radical Left Coalition, or Syriza, which came a surprise second in the May 6 election after campaigning on an anti-bailout platform, said he had requested "that the caretaker government should not implement measures that would involve further cuts in salaries, pensions and public spending, that would dismantle labor relations or allow privatizations." Mr Tsipras said he also asked for a freeze on every ongoing sale of state property.

The Greek privatization fund later said it had already decided to delay until after the election any decisions on the country's key commitment to sell off some state assets. Under its international bailout agreements, Greece must raise 19 billion euro ($A24.3 billion) through privatisations by 2015 — and has so far raised about 1.5 billion euro.

Mr Tsipras is the front runner for the next election. Recent opinion polls have shown him as likely to come first in the June vote, though with nowhere near enough votes to form a government on his own. The two mainstream parties, conservative New Democracy and socialist Pasok, have warned that anti-bailout policies will lead Greece out of the euro. "Two courses lie ahead of the Greek people: Either to change everything in Greece — with changes which can be carried out in a Europe that is also changing — or to experience the terror of an exit from the euro, the terror of isolation outside Europe and the collapse of all we have built so far," said New Democracy head Antonis Samaras. A win by Tsipras would put him in a dominant position to make a coalition deal with other anti-bailout parties.

"This will make reaching an agreement between the next government and Greece's international creditors extremely difficult, raising the risk of a Greek exit from the euro and sovereign debt default," said Robert O'Daly, Senior Economist at the Economist Intelligence Unit. "The consequences of this would be dire for Greece and probably the rest of the euro area."


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