/ 22 July 2011

No denouement in sight for Greek saga

This week German Chancellor Angela Merkel quashed hopes of finding a lasting solution for Greece at the crucial summit of European leaders, even as the International Monetary Fund warned of the repercussions for global economic growth if the eurozone’s debt crisis was not tackled quickly.

Amid suggestions that banks could be slapped with a levy of €10-billion over three years to raise €30-billion for another bailout of Greece, the German chancellor insisted that there would not be a “spectacular event”, such as a restructuring of Greece’s debt.

“Further steps will be necessary and not just one spectacular event which solves everything,” Merkel said. Economists warned that indecision after this week’s summit could cause severe tension in the markets.

Gabriel Stein, of Lombard Street Research, said: “Ministers must come up with some solution that does not involve postponing once again the difficult positions that alone can solve the fiscal crisis. Otherwise the next eruption of the crisis won’t be [later this year], it is more likely to be next week. Moreover, each failure to act raises the threshold for what must be done next time.”

In an assessment of eurozone policies the IMF piled pressure on European leaders to act to solve the crisis and pump more money into its banks. “It would be very costly, not just for the eurozone but for the global economy, to delay tackling the sovereign crisis,” the IMF’s Luc Everaert said.

But for now some European Union leaders remain in disagreement with the European Central Bank, which argues that a default by Greece would mean it could no longer provide funds to domestic banks. Leaders such as Merkel believe that the private sector needs to shoulder the burden of rescuing Greece.

There was confusion in the markets this week when Ewald Nowotny, head of Austria’s central bank, seemed to suggest Greece could default on its debt without causing a crisis for its banking sector. But he later issued a statement insisting he shared the view of the European Central Bank that a default was unpalatable.

The bank helps to fund the European banking sector in return for sovereign bonds, but will not do so if the country has defaulted on its debt. The confusion about the stance of the European Central Bank towards Greece pushed yields on two-year Greece bonds through 40% as speculation mounted that a default was more likely. —