After Dubai, now Greece?

By: Wolfgang Münchau

The EU will not come to the rescue unless Papandreou does the opposite of what he promised.

The Stability and Growth Pact

The Stability and Growth Pact (SGP) forms part of the rules and procedures for fiscal policy of the member states of the euro area. The SGP has been subject to criticism long before it was officially agreed at the EU summit in Dublin in 1997 and ever since. The debate about the SGP reflects some of the deep ideological divisions that have accompanied the creation of economic and monetary union. The opponents of the SGP have criticised inter alia that it is pro-cyclical and anti-growth.

Bailout time

The European Union starts preparing a bailout for Greece; Discussions center on bilateral credits or an early release of cohesion funds; Greek credit default swaps breached 400 basis points while the euro fell below $1.40; Daniel Gros argues that Greece and Portugal are worse off than Spain; France installs working group on balanced budget rules; Economic sentiment in the Eurozone continues to rise due to a bullish industrial sector; Ben Bernanke finally confirmed as Fed Chief; Austria’s finance minister calls for a Tobin tax; Gillian Tett says exchange rate volatility is the next hot subject on the political agenda.

It’s crunch for the euro area. The markets are turning on Greece and Portugal

Optimism about Greece did not last long; news that China is not bailing out Greece has triggered a mass flight out of Greek bonds; with the yield on the 10-year now close to 7%; markets are also starting to turn on Portugal; the ever complacent Jean-Claude Juncker says there is no crisis; John Authers says Greece is now considered riskier than the average emerging market; Sokrates delivers a 2010 budget with only modest consolidation efforts; Barack Obama sounds increasingly like Nicholas Sarkozy in his economic policy – loud and ineffective; A study shows that Obama’s plans are very difficult to implement in Europe; Carmen Reinhart and Ken Rogoff, meanwhile, says that markets have not yet woken up to the debt crisis ahead.

Greece woes China to buy bonds

Goldman Sachs tries to stitch up a deal, but Chinese appear reluctant; Jean-Claude Juncker says euro area must co-ordinate more than budgets, and calls on France and Germany to overcome their differences on co-ordination; Wolfgang Munchau writes that the euro area urgently needs a rule-set to deal with defaulting countries; Joseph Stiglitz says EU strategy’s towards Greece is a scandal, as it is likely to make the situation worse; Lorenzo Bini-Smaghi says excessively low interest rates for long periods can produce bubbles; IMF raises global growth forecast to 3.9% for this year; Breakingviews says Zapatero is not preparing Spain for the necessary measures that have to be deployed for the Spain to emerge from the crisis; Nouriel Roubini says Spain is a looming threat for the long-term survival of the euro area; China, meanwhile, is so desperate about containing the credit boom, that the government ordered banks to hold lending.

“Greek crisis over”

Yeah right. The Greek government’s bond auction was three times oversubscribed, but at a bond yield of 6.2%; the market comment was enthusiastic, and some are talking of a turnaround. The market data for bond spreads and CDS, however, showed only small improvements; Nowotny says he is concerned about capital inflows into emerging markets; Socrates is to present his budget today; European governments need to borrow €2.2 trillion this year; German business confidence rises; Sarkozy promises lower unemployment by next year; Charlemagne says euro area facing a slow and depressing decline; Charles Goodhart, meanwhile, offers a solution for the Greek/Portuguese problem: Introduce a parallel domestic currency, for use only in domestic transactions, and devalue that currency against the euro.

European Commission says survival of euro at risk

According to leak in German news magazine, DG Ecfin says internal imbalances are the biggest threat to the longevity of the euro area; says deficit countries need to adjust their wages, while surplus countries need to stimulate domestic demand; Ben Bernanke’s renomination has run into trouble in the US Senate; Greece announces a five-year bond issue to raise €3-5bn; Wolfgang Munchau writes that it would be a mistake for the euro area to impose austerity on Athens from the outside; Germany wants to co-opt the US into a joint strategy on bank reforms, whilst supporting the overall direction of Obama’s policies; Christine Lagarde, too, supports the US policies, though says crucial details still lacking; Lavoce points to an analysis of microdata from the Bank of Italy showing which type of companies suffered the most from the crisis; in Spain, meanwhile, housing credit started to picked up in November.