A week that shook the Eurozone
AFP PHOTO / JOSEP LAGO
With Spain on its way to the intensive care unit, key Eurozone decision makers like the European Central Bank governor, Mario Draghi, and the European Commissioner, Olie Rehn, have issued warnings to politicians this week over the short and the long term dead ends and offered effective tools to cut the Gordian Knots. Unfortunately the only good news for Eurozone, coming from the Irish referendum, are considered of minor importance.
According to Dublin government sources the Irish people have voted positively with a majority of around 60% in favour of the European Fiscal Pact, but this new European treaty of German inspiration is already obsolete, after the French president François Hollande created a new political dynamic in the Eurozone, favouring growth and bypassing the draconian fiscal austerity.
In any case Spain remains in the forefront of Eurozone's short term problems, while the Athens political ainigma is lurking in the corner. On Friday 1 June, last day for publishing public opinion polls ahead of the 17 June elections in Greece, the horizon remained unclear. The Syriza left wing political formation is being estimated by one poll to come first. The young leader of this party, Alexis Tsipras, menaces Greece's creditors with difficult negotiations if he wins. At stake is the Memorandum of Understanding (MoU) the previous Papademos government signed with the country's troika lenders EU-ECB-IMF, providing €130 billion in soft loans and recapitalisation funds for the Greek banks, but also demanding more severe austerity measures for Athens to zero its deficits.
This week, however, it was Madrid that shook markets and governments all over the world, with the burning issue of the Spanish banks' recapitalisation and the budget deficits. The rating agency Fitch-IBCA downgraded on Thursday 31 May eight Spanish regions, including Madrid and Catalonia. The hot issue however remains the Bankia's recapitalisation with €19 billion. This fourth largest Spanish lender sits on a portfolio of huge toxic assets, from loans to the bankrupt real estate sector. There are two more large banking firms, in the same dreadful position, reportedly needing another €10 billion in new capital. On top of that the majority of the country's regions are deep in the red and will be needing large injections of cash, to honour their maturing debts.
On the face of it, the Mariano Rajoy government said it can recapitalise the banks by itself, without asking for external help from the European Union or the IMF. At the same time Madrid has imposed on the regions a new Draconian austerity plan to cut down deficits. On both those fronts however the realisation of the programmes constitute the Gordian Knot and markets have raised the stakes against Madrid.
In such a climate during the next few weeks the Spanish authorities have to come up with €19 billion for Bankia and an undisclosed amount of money for the regions. Fortunately, the government has created a bailout fund for banks which now is said to have assets amounting to €12bn. The Spanish minister of Economics, Luis De Guindos denied the urgency of the Bankia recapitalisation and revealed that the bank will receive soon €7bn from this bank bailout fund. Guindos explained that the rest will be paid gradually until October. In this way he said the recapitalisation will be realised with Spanish resources and the country will not ask for external help.
All that have created a dark atmosphere all over Europe. In view of this, Mario Draghi, speaking on Thursday 31 May in the European Parliament, had to say loud and clear that the European Central Bank in an indirect way is now obliged to guarantee all deposits in the Eurozone's creditworthy lenders, through open lines of unlimited refinancing. He went on though and said that the ECB cannot go on for ever acting as lender of last resort to all Eurozone's banks. He refrained from saying 'and governments', because the ECB is not allowed to directly finance government deficits. In an indirect way however this is already a reality. The one trillion in three year loans at 1% interest cost the ECB handed to 840 Eurozone banks some months ago, has been used by those banks to a large extend to buy government bonds in their national markets. Draghi then stressed that Eurozone politicians have to decide what a euro area they want in the future and act accordingly. In a diplomatic manner he suggested that Eurozone has to create a 'European Banking Union' to recapitalise its banks, if the single money is to survive.
Along the same lines of thinking the usually conservative European Commissioner Olie Rehn, speaking in Brussels last Thursday also said that the Eurozone should create a 'Banking Union'. It was very characteristic that the usually very critical on Eurozone's sinners, left also to be understood that Spain should have a time extension of at least one year, in fulfilling its obligations of deficits reduction. It goes without saying that such a gift would be extended also to Greece, to Portugal and Ireland. In a few minutes Rehn appeared ready to change the EU agreement with Spain and the entire troika package for Greece. It was an outburst by Rehn against the Eurozone's austerity lovers.
In short all the first rate European dignitaries ring the alarm bell and demand that the Eurozone and the European Union countries, after the two years old debt crisis, have to either deepen their relations or gradually disintegrate. It is not by chance that practically all major world stock markets were in the red all along this past week. As for the euro its parity with the dollar fell on Friday 1 June bellow the 1.24 benchmark for the first time in two years.
All in all, Eurozone and Europe have to change to survive. And a possible exit, not of Greece but of Britain, will mark the beginning of the Union's downfall.
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