Eurozone finance ministers are sharply divided over how to handle the spiralling Greek debt crisis, Dutch finance minister Jan Kees de Jager revealed as he attacked France's plans for a new rescue package. Speaking in London after a meeting with the chancellor, George Osborne, de Jager said it was "illusory" to hope that Europe's banks would voluntarily bear their fair share of the costs of a new bailout for Athens, and that President Sarkozy's current proposals let Greece's private sector creditors off too lightly. Any evidence of a fresh split among European policymakers will increase anxiety in the financial markets, which were rattled on Wednesday by news that ratings agency Moody's had downgraded Portugal's debt to junk status. "We do have concerns about the French scheme," de Jager said. "I think it's illusory to think of such a scheme as voluntary, so we have to work on solutions so that banks reach a level playing field." As a non-eurozone member, Britain is on the sidelines of talks about a new bailout for Greece, but de Jager said Osborne was "very close to our position". The cost of insuring Portuguese government debt through credit default swaps hit a record high after the downgrade, while the yield on Portuguese 10-year bonds jumped by more than a percentage point to 12.07%, ratcheting up the pressure on Lisbon. European commission president José Manuel Barroso criticised Moody's announcement, saying: "In this context, and the absence of new facts on the Portuguese economy that could justify a new assessment, yesterday's decisions by one rating agency do not provide for more clarity. They rather add another speculative element to the situation."
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Thursday, July 7, 2011
Eurozone finance ministers are sharply divided over how to handle the spiralling Greek debt crisis, Dutch finance minister Jan Kees de Jager revealed as he attacked France's plans for a new rescue package. Speaking in London after a meeting with the chancellor, George Osborne, de Jager said it was "illusory" to hope that Europe's banks would voluntarily bear their fair share of the costs of a new bailout for Athens, and that President Sarkozy's current proposals let Greece's private sector creditors off too lightly. Any evidence of a fresh split among European policymakers will increase anxiety in the financial markets, which were rattled on Wednesday by news that ratings agency Moody's had downgraded Portugal's debt to junk status. "We do have concerns about the French scheme," de Jager said. "I think it's illusory to think of such a scheme as voluntary, so we have to work on solutions so that banks reach a level playing field." As a non-eurozone member, Britain is on the sidelines of talks about a new bailout for Greece, but de Jager said Osborne was "very close to our position". The cost of insuring Portuguese government debt through credit default swaps hit a record high after the downgrade, while the yield on Portuguese 10-year bonds jumped by more than a percentage point to 12.07%, ratcheting up the pressure on Lisbon. European commission president José Manuel Barroso criticised Moody's announcement, saying: "In this context, and the absence of new facts on the Portuguese economy that could justify a new assessment, yesterday's decisions by one rating agency do not provide for more clarity. They rather add another speculative element to the situation."
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European debt crisis: the German chancellor, Angela Merkel, needs to accept that the richer EU nations took a risky bet in buying Portuguese debt. Photograph: Picture Perfect/Rex Features
There is a growing sense of despair in Brussels. Unlike previous attacks on the euro project, the latest downgrade of Portugal's debt by the ratings agency Moody's feels like the beginning of the end.
Those economists and fund managers who argued that a second bailout for Greece with private sector involvement would mean something similar for Portugal and most likely Ireland are hitting their target.
Like a 19th century battalion holding the line against oncoming hoards with depleted firepower and an officer class at war with itself, the euro's supporters are in a desperate situation.
The only answer is for the EU richer nations to admit that they made bad decisions when they bought peripheral sovereign debt. It was not a risk-free bet. It turned bad and their assets are only worth 20 or 30 cents in the euro.
The French and Germans, in particular, have rather smugly portrayed themselves as wiser than everyone else during the financial crisis. That somehow their adherence to a regime of "conservative" bond purchases allowed them to avoid the problems visited on the US, Britain and most other European nations.
If anything it is the opposite. They are up to their necks in bad debts, just as much as the UK: it's just that their debts relate to bad loans made to Greece, Portugal, Ireland and Spain, and not housing developers or buying exotic financial derivatives.
Spain is often talked about as the next domino. On Tuesday ugly economic figures for Italy appeared to put Rome higher up the scale of walking disasters. Unless Brussels admits the full extent of the problems blighting Greece and Portugal, the panic will spread, hurting all of us.
As Bank of England governor, Sir Mervyn King, keeps insisting, the European crisis is not one of liquidity. It is a full-blown debt crisis. Therefore, offering more loans, especially at outrageously high interest rates as Brussels intends to do, fails to tackle the core problem, it only makes the situation worse.
Since last year's Greek debacle, European leaders have sought to provide lifelines to the worst hit countries by replacing the private debt markets with the European Central Bank. The ECB now holds almost £100bn of Greek debt. Portugal was in much the same position, but hoped to muddle through its crisis with just one bailout from Brussels.
Moody's says it is likely to join Greece in a second bailout because, like with Greece, private lenders are going to stay away for longer than expected.
Investors ask why they should buy the bonds issued by a country that will be forced to change the terms for the worse mid way through the life of the loan. That is what Brussels is contemplating for Greece. Moody's naturally assumes the same will be imposed on Lisbon.
Just as we found in the worst period of the banking crisis, attempts by politicians to save money and preserve asset values only make the situation worse.
The UK government was urged to nationalise the worst hit banks almost as soon as Northern Rock collapsed, but did everything it could to avoid recognising the problem and when it did, it tried mergers and loans coupled with austerity to minimise the effect on the state.
Lloyds was encouraged to merge with Halifax and when that failed it was told to use an injection of government cash, to be repaid, as a way to slim down. Now Lloyds, like most of our banks, are zombie institutions unable to help the UK economy get back on its feet.
The same recipe is being lined up for Greece and soon for Portugal.
Moody's recognises this unpalatable fact and says it fears "Portugal will not achieve the deficit reduction target – to 3% by 2013 from 9.1% last year as projected in the EU-IMF programme – due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system."
It then lists four main areas of concern. The first centres on the ability of Lisbon's new government to make promised cutbacks in sectors such as healthcare, state-owned enterprises and regional and local governments.
Delays in tackling tax avoidance, the possibility of a further bailout of local banks and limits on economic growth also sow the seeds of doubt that Portugal can make it through the next few years without extra loans.
Like the worst-hit banks, Portugal, Ireland and Greece are bust. To get them back on their feet there is a moral case for including private sector investors in further bailouts. Why should governments bear all the burden? It's a fair question, but that road leads to disaster. Even though many private investors in eurozone sovereign debt are EU banks and pension funds, and you might think a force for good, they have no other motive than to maximise returns. They will listen to Moody's fears and scram at the first time of trouble.
This contagion effect is real and economically ruinous. In Japan, businesses, politicians and academics are permanently worried about Greece. US policymakers likewise. Stocks fell in New York in the hours after the Portugal downgrade because the possibility of another Lehman Brothers felt real.
» The People's Bank of China raised interest rates for the fifth time in eight months, increasing both the one-year lending and deposit rates by a quarter of a percentage point. The central bank has taken a number of measures this year to restrict credit.
» Underlining the dangers from a growing mountain of debt to the Chinese economy, Moody's, a credit-rating agency, issued a report claiming that China's first official audit of local-government loans had underestimated their value by $540 billion, which would take the total to $2.1 trillion.
» Portugal reacted angrily to Moody's downgrade of its sovereign debt to "junk" status, complaining that it had not considered the country's recent austerity measures or new political consensus after an election. Moody's made the cut on the basis that Portugal will have trouble raising funds in the markets, if private investors take a hit in a second rescue deal for Greece. More European feathers were ruffled when Standard & Poor's became the first ratings agency to confirm that it may consider French proposals for private investors to roll over their Greek debt to be a "selective default".
» The World Trade Organisation ruled that China's curbs on exports of raw materials are illegal, upholding a complaint lodged by the United States, the European Union and Mexico. China criticised the decision, justifying its limits on exports of metal ores and other materials on environmental grounds. The WTO's ruling could help America and others in any dispute with China over rare-earth materials, which are used in high-tech products. China has one-third of the world's reserves and accounts for almost all of current production but it has restricted exports, which some think is to induce foreign technology firms to place operations inside China.
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