EU: The Relief Packages, the Summits and the Problems

The anticipated European Union summit has been postponed for 6 days, allowing for the 27 heads of government/state, constituting the European Council, to finalize a supposed comprehensive strategy on the Euro-area sovereign debt crisis.

The European Union has come under a barrage of pressure, once again, as Member States have been victim to downgrades, threats of downgrades, bank failures, bank downgrades, and an increasingly volatile stock market.  Fears that Greece and other highly indebted nations their debts, and cripple the banks that hold their bonds, have sent shock-waves throughout global financial markets.  Throughout the growing crisis, solutions proposed by the European Union have coalesced into a series of money pots, effectively kicking the bucket of Greece’s problems further down the road, never truly eliminating the threat.  In recent months, the Greek government has stated that it has been on the brink of bankruptcy, requiring billion in aid to ensure its “stable” functioning.  With chronic riots, strikes and overall social anarchy, the functionality of the government can be debated.  Nevertheless, Greece has stated that it needs an 8 billion Euro aid installment in November to avoid running out of money to pay salaries and pensions.  So saying, “hope” seems to be the sole currency capable of effect in stock markets, as world stocks rose on hopes raised by Sunday’s Merkel-Sarkozy meeting in Berlin with the Greek Finance Minister, Venizelos.  There is a lack of detail about the Franco-German plan and with the growing political gridlock in Slovakia, after the vote of confidence, there exists a high risk that any solution may be derailed over approving new power for the European Financial Stability Facility (EFSF).

“The German and French government are convinced this will be a contribution to the Euro-zone winning back confidence and its capacity to act – and I do mean a contribution, not the ‘miracle cure’ everyone keeps asking for.” – Steffen Seibert, German government spokesman

As mentioned in EU: European Stocks Fall as Greek Projections Worsen, a deeper than expected recession has derailed Greece’s budget deficits, resulting in their inability to meet EU and IMF requirements for relief aid.  But Greece’s arrogance is only challenged by the growing fiscal dilemma.  The Finance Minister, Venizelos, has taken the opportunity of his own country’s failure to announce his expectation that private investors and banks will sacrifice their investments by further investing into the rescue package of Greece.  One of the plans for Greece relief has been, and continues to be, private investment by banks, who would then receive a write-off on these investments, essentially weakening the financial structure of such investors.  This overall threat to the stability of threat to others has not deterred Venizelos, who expects an overall package better than the one initially drafted.  Venizelos further expects improvement in the 109 billion Euro rescue package agreed by Euro-zone leaders, which will result in banks taking heavier losses as well.  This plan is to be called “PSI Plus”, standing for private sector involvement.

The EU, IMF, and ECB mission chiefs, known as the troika, are likely to conclude their visit to Greece with a joint statement by Tuesday, which will lead to individual ministers and the IMF board, to decide on the aid package.  Yet, resistance is on the rise in Member States to the growing chance of unanimous sacrifice for the sake of Greece.  On the eve of a crucial parliamentary vote on broadening the EFSF fund’s scope, a small party in Slovakia’s five-party coalition rejected a compromise proposal despite fierce international pressure.  This standoff could force the prime minister to seek leftist opposition support, further weakening the political structure of Slovakia and delaying progress in the EU.  In Germany, newspapers have reported that Merkel has concluded that Greece was insolvent and is pushing for a mandatory debt restructuring.  According to FT Deutschland, Germany is trying to persuade its European partners to accept the inevitable, but was meeting resistance form the European Commission, the European Central Bank and Germany’s long time partner in the EU, France.  Clearly, the division in the EU will further delay any resolution for the growing crisis, making matters only worse.

“We need to make this a Summit that restores confidence, supports growth and job creation, and maintains financial stability.” – Jorge Barroso, President of the European Commission

With the G20 Summit approaching, the European Union leaders have escalated their pressure on Member States for resolution, integration, and reform.  With France holding the G20 Presidency, the summit gives Europe a special responsibility to illustrate reform and confidence in the financial markets.  Nevertheless,there has been widespread criticism that Europe has been far too slow in grasping the gravity of the situation.  There have been multiple costly bailout packages for Greece, Portugal, and the Republic of Ireland but stocks remain in turmoil.  The billion of Euros pumped into these countries, coupled together with widespread controversial austerity measures, there are high levels of debt still about in the Euro-zone economy.  Investors believe that a Greek default is all but inevitable, which also extends to the belief that a Greek default will infect Spain and Italy, concluding in their defaults, as both are much larger economies compared to Greece.  The global markets, the investors, the Member States and the EU need decisive action to avoid this scenario.

Currently, there are three main strands that might possibly evolve into a plan of action.  The first is that Greece will simply be allowed to pay back less than it actually borrows, meaning a write-off of the investment from private institutions.  This was exemplified in the above-mentioned PSI PLUS plan, which calls for a raise from 20% to 50% write off.  The next plan is embodied by the EFSF, which would, if ratified, is to be massively increased in size from 440 billion Euros to about 2 trillion Euros.  The 440 billion figure is the agreed amount of money the EFSF can raise through issuing bonds, but it is not entirely clear how the expansion of the EFSF would be enacted.  One suggestion is for the EFSF to guarantee the fist part of any losses creditors sustain from a government defaulting on its debt, with the ECB providing an additional 1.5 trillion Euros of loans.  Essentially, the EFSF would borrow money from the markets, rather than rely on taxpayers.  These July proposals have already recommended extending the power of the EFSF to allow it to buy government bonds and extend credit to highly indebted states and banks.  Finally, the last plan is the suggestion of strengthening big European banks that could be hit by any defaults on national debt obligation.

In retrospect, bolstering the EFSF means that a safety net would be constructed in the event of a default and it would ensure that provided bailout funds to indebted nations will be large enough to prevent the problem from spreading out of control.  With the G20 Summit approaching, a planned Council of Ministers meeting and a European Council meeting, expectations will intensify and anything less of a “miracle “cure will result in further fluctuations in the stock markets and an escalation of the European fiscal crisis, at the least.

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