The Euro was introduced to reduce trading costs, boost tourism and smooth the economy. So what has happened? See our timeline for a more detailed look at the events that have led up to the current Eurozone crisis.
Ireland voted “yes” in the referendum held today on the ratification of the Fiscal Compact treaty agreed in March (download a copy of our update dated 2 March on the treaty here , which was also seen as a vote for or against the Euro in this case.
There are renewed calls for action from the ECB today. Mario Draghi, president of the ECB, calls for EU leaders to show “proper leadership” and “vision” in dealing with the crisis. In his address to the European Parliaments economic affairs committee, he said that “there was no time to waste in fixing Spain and moving more radically towards a proper Eurozone fiscal union”. In the meantime Fitch Ratings warns that “the risk of a Greek exit is material and rising” in its report in which it outlines how it would respond to a hypothetical exit from the Eurozone (download a copy of Fitch’s report click here).
The European Commission issues its progress reports on the European economy. These are largely seen and referred to as “report cards” for each country. There were stern words for Spain to do more. Portugal, Ireland and Greece were simply told to stick to their programmes. France was warned it could miss its deficit targets for 2013 unless it takes "additional steps". The EC also made some general recommendations, including that the Eurozone should move to a banking union. It also offered support for "joint debt issuance" stating it would help the Eurozone through the crisis. The EC is also recommending that stricken banks could be recapitalised through the Eurozone's bailout fund. The EC warns the Eurozone may face “disintegration” unless it takes swift steps to address the crisis.
EC vice-president, Oli Rehn, announces that the EC is prepared to extend Spain’s deadline for bringing its budget deficit in line to 3% by 1 year, if it presents a solid budget plan for deficit reduction in 2013-2014. That means Spain would have until 2014 to cut its current deficit of 8.9% GDP.
The governor of the Bank of Spain, Miguel Ángelp Fernández Ordóñez, resigns early from his post. He was due to resign in July. Analysts generally see this just as an opportunity to give his replacement more time to get to grips with Spain’s ailing financial situation before the next budget is due. He takes the opportunity to warn that Spanish tax receipts may fall below target and spending may be higher than anticipated making it increasingly difficult for Spain to meet EU agreed debt levels.
Spanish bank Bankia’s share trading suspension is lifted and its shares plummet by 27%. Speculation in the market regarding how the banks recapitalisation (of around EUR 19bn) will be funded, causes further unrest on the markets.
Shares in Spanish bank Bankia were suspended due to “circumstances that may affect the normal share trading”. The suspension came following reports that night that the ailing bank will need EUR 19 bn of government support. The discussion regarding Eurobonds continues with Dutch caretaker prime minister, Mark Rutte, categorically ruling out Eurobonds “even if Germany changes its opinion”. In the meantime Latvia announced that it was closer than ever to being able to join the Euro.
The EU summit ended in the early hours of this morning with little concrete progress and any decisions being postponed until after 17 June (Greek elections). A seemingly widening gap is appearing between French and German positions over how to best deal with the Eurozone Crisis. In particular, the issue of Eurobonds is currently dividing Europe into two groups. Germany, Sweden and the Netherlands have publicly expressed their lack of enthusiasm for the concept of common debt issuance, citing the practical difficulties of implementation and their belief that issuing more debt will not help the current debt crisis. However, France, Italy, the IMF and various other Eurozone and non-Eurozone countries have stated that they believe that the practical difficulties of issuing Eurobonds can be overcome and that they are potentially still the fastest solution to the crisis. Today in an interview in Rome, Mario Monti (Itlay’s Prime Minister) said: “Italy is very much in favour of the creation of Eurobonds when the time is right, and we do not expect it to be too far off”.
Another concept that has been bouncing around the Eurozone is the Financial Transactions Tax (FTT or “Robin Hood” tax as it is also known), which would levy a tax on certain qualifying financial transactions. The UK is vehemently against the proposal as it fears its financial services sector will likely be hit hard by the tax unless it is applied on a global basis, which is almost impossible to achieve. Others believe that it is a good way to boost the economy and a fair way to tax those who benefit most from market ups and downs. The concept of a FTT is not new; in 2011 there were 40 countries worldwide that made use of a FTT, together raising EUR 29bn*.
While the German and UK economies show contraction this quarter, their sovereign debt has strengthened to record levels. Both countries’ 10-year bond yields are at all-time lows (1.375% and 1.739% respectively). While this is good news for their borrowing capacity, some experts believe it is a further sign that the financial system is breaking down (see also the post on 23 May regarding the German “zero-coupon” bonds). This has been compounded by the Bank of England’s quantitative easing programme and the ECB’s LTRO programme which are also affecting the bond markets.
The latest poll in Greece (undertaken by Public Issue/Skai Tv) shows Syriza leading with 30%, New Democracy with 26% and Pasok trailing with 15.5%. This result would give Syriza a large majority, but not large enough to govern alone. According to the same poll, 85% of Greeks want to remain in the Eurozone, but at the same time, they are opposed to the austerity measures imposed under Greece’s financial programme.
Germany sold EUR 4.5 bn of two year zero-coupon bonds at 0.07% this morning. It is the first time it has issued “zero-coupon” bonds which effectively means that investors will receive no regular payments throughout the life of the bond with the yield resulting in slightly lower payment on the bond than face value. The move came after increasing appetite from investors for “safe” German debt and some analysts say it a sign that the financial markets are no longer functioning properly.
After yesterday’s call from the IMF to the UK for further quantitative easing from the Bank of England to help sustain its economy, it voted (8-1) against such measures.
EU governments announced an agreement to allow a pilot to go ahead for a new type of security called “Project Bonds”. These bonds represent pooled borrowing, but are not mutually backed and so are not like the proposed Eurobonds being discussed in the context of the Eurozone crisis. However, they are seen by many experts as the first step towards common debt issuance. They will be used to fund pan-European, cross-border infrastructure projects. The pilot phase will take place between 2012 and 2013.
Greek officials categorically denied that there are contingency plans being drawn up for a potential exit from the Eurozone. Separately, the Belgian finance minister said that it would be “irresponsible” for affected countries not to have such plans in place, likening the event to a terrorist attack; something you want to avoid at all costs, but need to plan for nonetheless. In addition the Bundesbank claimed that a Greek exit from the Eurozone would be “manageable”. All of which sent stock markets into disarray as leaders prepared to meet in Brussels this evening for an informal summit where the Eurozone crisis and the situation in Greece will be on the agenda.
The OECD slashed its forecast for the Eurozone economy in 2012 to a contraction of 0.1% (from growth of 0.2%). Chief economist Pier Carlo Pardon highlighted the fact that the: “flat growth in the euro area hides important differences with northern countries growing and southern countries in recession”. The OECD also warned Germany to drop its resistance to new measures to ease the crisis, or risk dragging the global economy back into a repeat of the recent downturn. The IMF completed its review of the UK economy warning that it needs to consider a new fiscal stimulus plan if the British economy does not recover and that the Bank of England should stimulate the economy through another round of quantitative easing.
Outside the Eurozone, but interesting by comparison, Japan was downgraded today by Fitch from A+ to AA. Japan’s debt pile is set to grow to 239% of GDP by the end of 2012, according to a representative of Fitch, which is the worst of the major economies. Japan’s sovereign debt has been able to grow steadily as most of its bonds are purchased by domestic buyers rather than on the international market. Fitch also held a press conference today at which they suggested that a third LTRO by the ECB may be necessary.
Ahead of tomorrows’ informal EU summit and in relation to French president Hollande’s call for Eurobonds yesterday, Dutch finance minister Jan Kees de Jager stated in an interview that while the Dutch government were not adamantly opposed to the concept of collective borrowing, they believed that it could only be introduced once Europe has made a lot of progress towards full fiscal union.
Meanwhile in Greece, political parties seem to be posturing ready for the elections. A small splinter party joined mainstream New Democracy party to form a “patriotic, pro-European front” and Syriza submitted a so-called “founding statement” to Greece’s Supreme Court that defines itself as a single party (rather than a group of several left wing parties which it has been up until now). This is an important move as it will give Syriza the right to 50 extra seats should it win the most votes in the next elections. A public issue poll conducted over the weekend shows New Democracy catching up with 24% of the vote compared to Syriza’a 28% - however this is an increase for both parties from the 6 May elections (respectively 18.9% and 16.8%) with Pasok and KKE being the main losers.
On 19 and 20 May world leaders attending the G8 summit failed to come to any real conclusion on what to do about the Eurozone crisis and Greece in particular. The next international summit is an informal EU dinner summit on Wednesday 23 May, although leaders are already warning that it will be difficult to take any meaningful decisions while Greek voters have yet to decide on a government and potentially whether they will stay in the Eurozone.
Freshly elected French President, Fracois Hollande, calls for Eurobonds to be placed back on the discussion table. His request is swiftly met by a rejection of the proposal from Germany stating that any common debt issuance would require further and closer fiscal coordination and integration. One of the major problems with Eurobonds, as pointed out by experts, is that they would take a potentially long time to implement as they would require constitutional changes in many Eurozone countries and a number of EU treaties would need to be amended. Germany countered with their suggestion of adding growth measures to the already agreed fiscal pact. Finance ministers from Germany and France will meet today, ahead of this weeks’ EU summit, to try and hammer out a common position.
Greek leftist party, Syriza’s leader, Alexis Tsipras, said in an interview that he is not against the monetary union. He wants European leaders to understand that, in his opinion, the current measures taken against are like “throwing money into a bottomless pit” and that “the current austerity plan is misguided and lacks legitimacy” and finally that “given there is no legal way to exit the Eurozone, Greece, not the rest of Europe, ultimately holds the trump card”. Tspiras flew to Paris to meet with French left party leaders to bolster support for a pro-European but anti-austerity approach to the crisis. He is scheduled to fly to Germany tomorrow for a similar meeting with German left party leaders.
Spain: Last night Moody’s downgraded 16 of Spain’s banks citing the Spanish economy and the Spanish governments’ reduced capability to support its banks as the reason.
Greece: Leaders and finance ministers from various Eurozone member states step up the pressure on Greece to form a cohesive, pro-bail out government or suffer the consequences as well as speaking out, highlighting the potential resulting chaos for the rest of the Eurozone should Greece decide to exit the monetary union. As a result of Fitch’s sovereign downgrade, Greece’s banks were also downgraded to CCC. This was deemed fairly inevitable as it is unusual for a bank to have a higher credit rating than its sovereign. A brief telephone conversation between Ms. Merkel and Greek president Karolos Papoulias nearly erupted in a diplomatic disaster as Ms. Merkel’s comparison of the coming Greek elections to a referendum on whether the Greece remains in the Eurozone, appears to have got lost in translation and was interpreted by the Greek president as a request from Ms. Merkel to hold such a referendum. The affair was smoothed over but analysts commented on it as a sign that diplomatic tensions may be starting to fray.
This weekend sees a new G8 Summit at which Greece and the Eurozone Crisis are firmly placed on the agenda. All eyes will be on these leaders to try and agree on a strategy to “get on top of this” as Canada’s prime minister was quoted saying ahead of the summit.
France: Francois Hollande is sworn in as the new president of France on the same day as France’s economy is reported to have stagnated (0% growth) over Q1 2012, emphasising the challenge he faces as he takes office. While some countries suffered further contractions such as the Netherlands, Greece and Italy, Germany boasted 0.5% GDP growth and the Eurozone GDP was better than expected remaining at 0% instead of the predicted 0.2% contraction. After his inauguration, Hollande is due to fly out to meet Angela Merckel for talks.
Greece: After five more days of trying to forge a coalition to govern Greece (including attempts to form a “unity government” and a temporary “technocrat and political personality government”), the final talks among party leaders failed and Greece faces new elections as early as mid June. Current polls indicate that Syriza would most likely take the lead, indicating a further shift to the left and away from austerity. The news hit the stock markets hard as they went into free fall with the main index in Athens falling by 5.2% and Greek bank shares losing around 10% within an hour of the news. The Euro tumbled to its lowest point against the US dollar since January. Eurozone and EU members (including Germany and Sweden, which is not a Eurozone member but is feeling the brunt of the crisis) again insisted that, regardless of the political situation in Greece, the country must stick to its financial commitments or face losing further bail-out payments. There is also real concern that Greece could soon run out of money. Eurozone leaders have determined to withhold further funds under the bail-out until the political situation becomes clear and Greece confirms it will honour its financial commitments. Currently a EUR 18 bn cash injection for Greek banks is on hold and a senior official in the outgoing government admitted there were concerns over whether Greece could "make it" until the next election. The IMF (Christine Lagarde) said it “hoped” Greece wouldn’t leave the Eurozone but admitted: “We have to be technically prepared for anything”.
Meanwhile, in a controversial move, the Greek (caretaker) government did decide to pay EUR 435 million to investors who hold bonds that matured today. The move was seen as controversial by some experts as these bonds are part of EUR 6.4 bn of outstanding debt held by traders who refused to take part in the bond swap earlier this year, reducing Greece's national debt by €100bn (HYPERLINK TO PSI UPDATE 20 MARCH).
Italy: Moody downgrades 26 Italian banks by as much as four points in some cases, citing devaluation in assets, the negative impact of austerity measures and the general ongoing Eurozone crisis as the reasons why. Italians were furious at the downgrade with top officials (such as Pierferdinando Casini – leader of the centrist UDC party and Luigi Abete, chairman of BNL) calling it "a criminal plan against Italy and Europe" calling for the decision to be viewed "with a huge pinch of salt".
Spain: The Spanish government announced that the EUR 4.5 bn in government loans given to Bankia over the last two years, will be converted into shares representing approximately 45% of the banks capital, effectively giving the government control over the bank. The move came after the surprise resignation of Rodrigo Rato, head of Spain’s largest bank, Bankia, just hours after prime minister Mariano Rajoy announced a major shake-up of the troubled banking sector on Monday 7 May 2012. Ailing Bankia holds 10% of the country's deposits and is considered to be one of the worst hit banks by the construction bubble burst.
Greece: Greek politicians continue to flounder as the mandate to form a coalition is passed from Syriza to Pasok after Syriza announced last night that it, too, could not form a coalition. Analysts and experts expect Pasok to be unsuccessful and a second round of elections to be called. Greece was due to receive the next tranche of bail-out funding of EUR 5.2 bn today. After much discussion and fresh warnings from the ECB and Germany in particular, the EFSF (the Eurozone stability mechanism) confirmed that it had sent EUR 4.2 bn to Greece’s special account, withholding EUR 1 bn of funding. The numbers are no coincidence: Greece needs EUR 4.2 bn to make scheduled payments under its financial programme. Klaus Regling, head of the EFSF confirmed that the remaining EUR 1bn would not be released until the Troika had reviewed and assessed the situation in Greece, sending a strong message to Greece regarding reneging on its financial commitments under the bail-out programme and the need for stable government.
Greece: On 7 May, Greece’s largest party after the elections, ND, announced, within just 4 hours of receiving the mandate, it could not form a coalition. This meant that the second largest party, the left-ist Syriza, led by Alexis Tsipras, was granted the mandate this morning to attempt to form a governing coalition within the next three days. Upon receiving the mandate, Tsipras immediately denounced the terms of the bail-out declaring it “null and void” as it no longer had an electoral basis due to the fact that the Greek population had, en masse, rejected the parties (ND and Pasok) that signed up to it. He then called for the immediate cessation of payments under the bail-out agreement and the termination of austerity measures that are currently hitting the Greek population hard including cuts to pensions and salaries and the abolition of collective employment agreements. He also called for an end to MP immunity from prosecution and an investigation into the causes of the Greek public deficit. His remarks sent global markets into a frenzy as stocks plummeted and the Euro sank to its lowest rate in at least 3 years. The ECB issued warning statements that Greece must adhere to the financial programme if it wishes to stay in the Eurozone, further fuelling speculation that a Greek exit is increasingly on the cards. So far communist party KKE and mainstream party ND have refused to participate in a coalition increasing the likelihood that Tsipras, too, will fail to form a coalition and that a second election will be required.
France: Francois Hollande wins the French presidential election with just under 52% of the votes, ousting Nicolas Sarkozy from office after only one term. During Hollande’s campaign, he expressly called for renegotiation of the EU Fiscal Compact agreed in March by EU leaders (excluding the UK and Czech Republic – See our Update of 2 March 2012 [ADD HYPERLINNK TO UPDATE]) and an end to the, according to him, German-led austerity policy in Europe. Germany’s chancellor (who openly backed Sarkozy during his re-election bid) and finance minister both publicly warned that renegotiation was not an option and that France would have to stick to its agreements regardless of who was in office at the time. Hollande promises France “growth, jobs and prosperity” and feels that “in a lot of European countries there is relief, hope that at last austerity is no longer inevitable”. Sarkozy is the 11th leader to have lost power since the start of the economic crisis in 2008. Frances public debt currently amounts to around 90% of GDP and at almost 57%, it has the highest ratio of government spending to gross national product of any of the Eurozone countries. France is due to hold its parliamentary elections in June.
Greece: Greek voters also went to the ballots today to vote for a new government. Since the resignation of George Papandreou as Prime Minister back in November 2011 [ADD HYPERLINK TO NOVEMBER 2011 ON THE TIME LINE], Greece has been governed by an unelected ‘technocrat’ government led by Lucas Papademos, a former vice president of the ECB, assigned with the task of pushing through the second bail-out loan Greece needed to prevent a default. As a result of the ensuing biting austerity measures, in today’s shock vote the Greek population issued a strong statement to the Eurozone that they have had enough of austerity, shunning the two usually popular parties, ND (New Democracy) and Pasok (which respectively lost 14.6% and 30.7% of the votes compared to the last election in 2009), leaving the country in political turmoil. With no party achieving more than 20% of the vote, it is now down to the party with the most votes, ND with 18.85% of the votes, to form a coalition that can govern Greece. Leader of the ND, Antonis Samaras, has just 3 days to try and achieve this. If he fails, the second largest party, new and extremely anti-austerity party Syriza, led by Alexis Tsipras, must try and if he fails, Pasok’s Evangelos Venizelos (former finance minister and co-negotiator of the recent bail-out loan) must also try. If all three leading parties fail to form a coalition, then Greece must hold elections again. With some parties already ruling out being in a coalition with each other, the coming 10 days will be closely followed by all interested parties.
Waking up to the results of two elections that could both have a profound effect on the course of the Eurozone crisis, has had a predictably turbulent effect on the market, causing Mediterranean bond yields to soar and the Euro to fall.
The ECB held its monthly policy setting meeting. Although inflation in the Eurozone is currently only at 2.6%, Mario Draghi, the current president of the ECB, confirmed that, as expected by the markets, there was no intention to further cut interest rates at this time. He did called for strong action to be taken to help the Eurozone’s unemployed youth and to start looking at agreeing a ‘Growth Compact’ to compliment the already agreed ‘Fiscal Compact’. He is quoted as saying: “Growth is sustainable in the long run if it is built on a number of pillars, and one of those is fiscal sustainability”. The monthly meeting comes at a time when seven Eurozone countries officially find themselves in recession: Greece, Spain, Italy, Portugal, the Netherlands, Ireland and Slovenia.