Eurozone as we have known it end of story


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Eurozone as we have known it end of story

  1. 1. Eurozone as we have known it: end of story 03/11/20111. GreeceTuesday’s announcement by the Greek Prime Minister, Georges Papandreou, of animpeding referendum on the second rescue package concluded a few days before sentmarket rolling and policy makers tangling in despair and frustration.It was doubtful that this rescue package would work, but at least it was buying (wasting) abit more time.Interesting enough Wednesday’s evening discussion between Merkel, Sarkozy andPapandreou ended up for the first by mentioning the exit of euro for Greece if Greeks voteno to the rescue package, which so far was dumb impossible… As I wrote to JC Juncker inJuly, Europe lacks credibility and its first task should be to reinstate it: For 2 years, theopposite way has been followed by a succession of denials and scapegoating.If I were Greek, I would go straight away to my bank and get all my cash to hide it underthe mattress; so, expect a run on Greek banks that are bankrupted anyway with their loadof junk Greek sovereign debt.November-December 2011 debt redemption schedule:11 November: EUR 2 bn (26 wk T bills) + 49 mio interest18 November: EUR 1.6 bn (13 wk T bills) + 18 mio interest12 December: EUR 2 bn (26 wk T bills) + 50 mio interest23 December: EUR 2 bn (13 wk T bills) + 46 mio interestAccording to Papandreou, Greece has enough money to survive until mi-December, so justafter the referendum due to take place 4th December.Well, if there is a referendum (there are rumors it would be called off; what a farce!!):Papandreou called a vote of confidence for Friday; if he does not win then new electionswould be called and the referendum becomes history. The EU and IMF would provideGreece with its EUR 8 bn 6th tranche from the first EUR 110 bn rescue package.Alternatively a Government of national union could be formed with the opposition. Thiswould be the best outcome for the EZ and the euro. 1
  2. 2. ItalyFriday’s bond auction witnessed an interest rate increase to 6% (so before Papandreoureferendum announcement) and since, borrowing costs have reached a record high (10year bonds reached a high of 6.399% today), not seen before the creation of the euro. Thecost of debt is not sustainable.Wednesday evening Berlusconi could not get cabinet approval when his Northern Leagueally refused to increase the retirement age from 65 to 67 years as demanded by Merkel-Sarkozy for the G20 meeting in Cannes, which castes doubts about Italy’s ability toimplement unpopular measure to reduce its (slowly) mounting debt.Whilst Italy’s economic situation is on many indicator much less worse than France’s, itsweak political system, large legacy debt and slow growth are making the country the targetof markets.France is however not far behind. 2
  3. 3. FranceOn many indicators, France is in a worse situation of Italy: debt increase (will soon catchup Italy), primary budget deficit, trade balance and unemployment.The 2012 budget is based on a 1.75% real GDP growth that will not be reached: theconsensus stands at 0.9%. This means finding EUR8-9 bn to maintain the objective ofdeficit reduction down to 4.7% in 2012 and 3% in 2013. However, most of the rumoredmeasures are in the form of tax increase and not economies. Yet with the previous EUR11bn deficit reduction announced a few weeks ago, EUR1 bn was made of cost cutting whilstEUR10 bn were tax increases. France has always the tendency to increase taxes instead ofreining in it overload civil service (in particular with local authorities which has boomedfor the past 10-15 years).Markets are taking notice and spreads with Bunds have trebled since early July:France is next in line (together with Belgium) and is at risk of loosing (should loose) itAAA rating which is the cornerstone of the EFSF together with Germany’s AAA. Anydowngrade will pressure rates at which the EFSF borrows ; yet, Wednesday, the EFSF had 3
  4. 4. postpone a EUR3 bn bond issue schedule in the next fortnight and 10 yr spread overGerman Bunds increased to 1.5% from 0.7% in September.The current crisis exemplified, if needed to be convinced, that the construction of the EUand EZ is a Franco-German affair. Whilst Germany is clearly in the driving seat (in the endwho gets the money decides), there still is an appearance of equality between the twocountries: would France loose its AAA, this balance would be shattered and Germanycould, politely, pursue its own interest, eastwards…ConclusionFrance is the hidden weak link of core EZ and this begins to appear openly. I very muchdoubt that France will be able to abide by its budget deficit forecast without numbermuddling (France can always call on the CDC – a large French state-owned financialinstitution- to get a couple of billions euros).After this crisis, the EZ cannot be the same: the way it works, decisions taken, budgetsvoted, Maastricht criteria respected (or even more stringent ones: no budget deficit),money spent, will make the EZ, if it survives, a different planet. Even its perimeter can bechallenged. I still believe that a narrower EZ with a euro DM is a possible outcome: thequestion is, would France be part of it?Anyway, Europe will be German or will not be.Source:Bloomberg: Europe’s Financial Crisis Deepens as Greek Government Teeters Berlusconi Arrives at G-20 ‘Empty-Handed’ After Vowing Economic Overhaul Times: EFSF postpones €3bn bond issue 4