The figures from the past few days make for grisly reading: Greek, Irish and Spanish bond yields have hit record highs, the euro has weakened significantly, growth statistics have disappointed, Spain’s ruling party has lost regional elections and ratings agencies have taken further action on Greece and Italy.
All of that will heap further pressure on the eurozone to clarify its intentions with regard to the periphery and beyond.
It is understandable that a consensus on issues as tricky as the sovereign debt crisis is hard to achieve. Even high profile individuals are struggling to conceive of a solution: “I have no idea what one does with Greece”, said none other than Crispin Odey earlier this month.
That EU and its myriad constituent parts cannot agree on a solution, then, is hardly surprising: less easy to understand is the stream of talking heads who appear to be at pains to contradict one another on a weekly basis.
Reprofiling
Today, EU Economic and Monetary Affairs Commissioner Olli Rehn said that a debt reorganisation may be examined by the powers that be. The current state of affairs is that a reorganisation, a reprofiling, or even a rescheduling of debt (call it what you will), is on the agenda, but a restructuring is certainly not.
It almost goes without saying that this was not the official line a few weeks ago, and furthermore it is still not the line of the ECB, which has been extremely vocal in its opposition to the idea that Greek maturities could be extended – in part, no doubt, due to the fact that the central bank itself holds a significant amount of Greek debt. Regardless, the contribution has accelerated the latest stage of the crisis, as those bond yields indicate.
As M&G’s Jim Leaviss has pointed out, the world is overdue a sovereign default. Defaults will always be anathema for policymakers, particularly now they are painfully aware of the interconnectedness of the financial system – and hence seemingly paralysed by the fear of a new crisis.
The other extreme
But the eurozone is stuck at the other extreme. All ‘resolutions’ thus far have been focused on buying time, in the assumption that time is all that is required for sovereigns to implement their austerity programmes while simultaneously growing their way out of trouble. Time will also give banks the ability to rid their balance sheets of their peripheral sovereign debt, or so it is hoped.
Progress on the latter process is hard to define, but the sovereigns are hardly flourishing. Populations are not taking austerity measures lying down, and debt to GDP ratios and budget deficits are far from declining – quite the opposite, as the European Commission made clear last week when it said Greece’s deficit was now expected to exceed a 7.5% target by some two percentage points this year.
How a reprofiling, ie an extension of maturities, would feed into the system is unclear. It may not trigger a CDS event, as the ECB fears, but it may force banks to write down some of their holdings. But as Ignis’ Stuart Thomson has noted, ‘extend and pretend’ can only go on for so long.
The ECB’s faith in the serene progress of current events seems particularly foolhardy given that it has embarked upon a tightening rate cycle. Even more questionable is the fact that it seems to be one step away from open warfare with eurozone leaders on the issue.
Eurozone leaders seem content to let a combination of markets and populations force the issue, hence the apparent change of heart on reprofiling. It is still too early to say whether that solution, or a more radical proposal involving bond swaps, will come to pass. But a continued opposition to all forms of restructuring, even ‘soft’ measures, could ultimately force the eurozone to face exactly the kind of default scenario that it has worked so hard to ignore.
