Fortune Magazine’s Shawn Tully has a stab at analysing the eurozone/European crisis. Its nothing we haven’t covered before at PIIGSty.com but heres the summary:
- Greece is a mess. The climate for business is extremely weak
- Theres two problems feeding into the stock market volatility (a) Fear of contagion in Europe (2) S&P downgrade of US sovereign debt (reflective of a polarised political environment in the US Congress)
- Rumours suggest that French banks (big owners of Italian and Spanish bonds) might be struggling to stay liquid
- European credit crunch is happening (European banks are worried and reluctant to lend, slowing EU growth) – this could kill a US recovery (EU accounts for 21% of US exports)
- If 1 country leaves the euro, then domino effect likely causes gigantic defaults and an EU banking crash
Story of the euro
See the PIIGSty Publication on the euro – but FYI its like this…
- Launched in 1999 aiming to bring Europe closer together (in terms of productivity and growth) and make the eurozone the equal of Asia or the US
- Didn’t work – some took advantage of imported low interest rates (via leapfrogging on German credibility) with rates falling from 15% to the German level of around 5%. PIIGS boomed!
- These countries (Italy, Spain, Greece are mentioned) didn’t allow productivity levels to improve – they binged on cheap credit – continued support for cartels, anti-competitive practices and centralised wage bargaining.
- Example of Greece: Money didn’t go to improve the capacity of the economy – it went on discretionary/consumer spending – meaning higher wages. Greece became expensive for tourists.
- ECB now has to buy Spanish/Italian bonds to ease the pressure on the now debt laden countries from falling victim to contagion from Greece
Two things need to happen…
- Austerity- the PIIGS need to close their deficit gaps
- Modernisation and Growth – PIIGS need to grow (to pay the debt) via modernisation/privatisation plans AND belated open their markets
- Greece: Greek debt to hit 150-172% of GDP by 2012. 2nd Bailout agreed on 21 July is to tide them over until 2013 at which point they should be able to borrow normally on the open market
- Italy: (One of the TBTBO – Too Big to Bail Out) – ECB trying to buy debt to keep the price down – if it crossed 7%…Italy’s debt Is €2.2tn, 3rd largest in the world (Behind US and Japan). BUT it has a small budget deficit (4%) – Italy needs to grow fast
- Spain: (The 2nd TBTBO) – Reverse of Italy – its problem is the budget deficit which is current 9.2%. Why? Housing bubble burst, weakened lenders.
Key Future Issues
- The EU weakness – EU lacks a real (non-political) lender of last resort. Germany (highly politically) is currently fulfiling that task begrudgingly
- EFSF – its being granted new powers (July 21 reforms)
- Eurobonds – bonds issues by all of the eurozone-17 nations – which would be a heavy weight on wealthy countries (like Germany who continuously foot the bill for Europe)
- Reforms – the best method to restore investor confidence (reversal of runaway spending)