Euro crisis: Grading the summit
- 21 July 2011
- From the section Business
It is inconceivable that eurozone leaders will end their summit without declaring they have reached an agreement on the problems facing Greece and the euro. That is not how these things go.
The question will be whether the solution they find has appreciably lowered the chance that we will be back facing another "crunch point" in a few months' time.
As I suggested on the Today programme, I fear the answer to that question will be no.
Overnight, Germany and France are said to have agreed on a solution for involving the private sector in a second Greek bailout.
I am told that officials are now exploring some of the specifics with key representatives of financial institutions - like Charles Dallara, of the Institute of International Finance - so the European leaders can say that they have at least some private sector support for the plan.
Short-term, the most important issues arising will be:
- Have they avoided Greece being labelled in "technical default"?
- Have they created new holes in Greek and other bank balance sheets by forcing them to swap and/or mark down the value of their Greek debt holdings, and if so, do they have a plan for filling those holes?
- And, most important of all, have they significantly lowered the present value of Greek sovereign debt?
A bank levy on all eurozone banks would avoid a "default" on Greek debt, but it raises enormous practical difficulties and questions of fairness - particularly when you consider that a significant chunk of Greek debt is owned by institutions outside the eurozone.
There will thus be great relief that this half-baked proposal appears to have been dropped. But the upshot is that the leaders are very unlikely to avoid a selective default on Greek debt.
So, to some extent, they will be calling the European Central Bank's (ECB's) bluff. But as we know, the question of what constitutes a default has never been black and white.
Behind the scenes, ECB officials have been quietly preparing the way for a compromise that would allow a partial or temporary default on Greek bonds, without Greek banks losing the right to some support from the eurozone's central bank (though that support might have a different label than before, and somewhat different conditions).
This compromise has not yet been fully worked out, but I would expect to hear more in the coming days.
It's not as if the ECB's president has not caved in before: remember it was Jean-Claude Trichet who said the International Monetary Fund (IMF) should never get involved in helping the euro. In the end, Germany over-ruled him on that point as well.
But those are just the immediate issues relating to Greece. The larger question to ask of the "solution" that leaders announce today will be whether Germany, and other core economies, have agreed to impose extra financial obligations on their taxpayers, as a price for safeguarding the single currency.
- Have they expanded the European Financial Stability Facility (EFSF) - the emergency rescue fund for the eurozone - and if so, by how much?
- Have they also agreed to broaden the facility's remit, and if so, does that extend to the EFSF itself buying sovereign debt of troubled economies on the secondary market?
- And, finally, what, if anything, does the agreement have to say about developing a common euro bond?
My guess is that we will see the first two of these, but in fairly diluted form, and there will not be a specific mention of the euro bond, which is a source of great political neuralgia for Chancellor Merkel.
Similarly, though the EFSF may get the power to fund bank recapitalisations, for example, in countries that have not yet been formally "rescued", leaders are unlikely at this stage to permit it to purchase national sovereign debt on its own account.
The bottom line is that the summit is likely to end with a modest increase in the long-term liabilities of Germany and other core economies, and a modest fall in the long-term liabilities of the periphery - notably Greece.
Given the political realities that leaders face, that would be a reasonable outcome.
After all, the result of the most previous summits has been that the long-term liabilities of Greece and other peripheral countries go up (as a result of all that emergency lending from the IMF and European governments).
But, as Chancellor Merkel indicated earlier this week, we are talking small steps, not a grand scheme that will "silence all doubts", "put a line under this crisis once and for all", or fulfil all the other cliches on this subject.
That is because there is simply no political support for that kind of grand commitment - in Germany, or anywhere else. And last time I looked, the members of the eurozone were democracies.
Thursday's summit will go as far as the politicians are able to take it. The question for tomorrow will be how long it takes for financial markets to once again start forcing the pace.