Another week, another Euro deal.
This time, Spain has secured a $125 billion bailout of its essentially bankrupt banking system, saving it from the consequences of the construction bust – for the time being. But the cost will essentially be passed on to the country’s sovereign debt, exacerbating Spain’s other problem: how to stabilise the government debt ratio.
Indeed, in the latest turn in the Eurozone debt crisis, Gavyn Davis estimates that a bank bailout of €80 billion, while solving the problem of the Spanish banks, would be at the cost of adding around 11 percentage points to the government debt ratio, taking it to over 100 percent of GDP by 2015. As it is, Spain is paying around 7 percent borrowing costs; with austerity measures still to bite and unemployment at 25%, tax receipts are likely to fall and the situation will only get worse.
Meanwhile, Greece voted over the weekend in their national elections and failed to secure a clear majority to form a new government. They will therefore by saddled with a coalition of warring parties incapable of delivering on the austerity measures they have signed up for. Tax receipts are dwindling and reserves have been pouring out the country, a Greek exit from the euro is being widely debated and contingency plans drawn up.
In the NY Times, Jürgen Stark, a former member of the European Central Bank’s executive board said, “Even in case of a new government, I doubt whether the institutional framework in Greece can guarantee the (austerity) program. Who has the competence to implement the program? That is the key point.” While Greece’s exit is not a foregone conclusion, it’s looking more likely than not.
Next Steps for Greece, Spain and Europe
That, discussed seriously for the first time being, could be the end of the Euro as we know it. France could not stay in a union that required the kind of funds needed to bail out Italy, and Germany would not be willing to saddle the next generation with that level of debt either. That’s what investors fear — that the whole structure unravels — and while suggestions have been made over the last year that this could be the end game, no one seriously believed the leading powers could really sit on their hands all this time and do so little.
But here we are, four years after 2008, and that is exactly what Brussels, or more realistically Berlin and Paris, have done — far too little, far too late.
No wonder the commodity markets are fixated on Europe, hopefully scrambling to put commodity risk management strategies in place. A Euro breakup would have a cataclysmic impact on the global banking sector. The fear that this could actually happen, or that a midway result almost as bad is the likely outcome, has been the main factor depressing both confidence and prices.
Until Europe’s banking and sovereign debt funding issues start to make some tangible progress to a solution the markets can confidently believe in, demand and commodity prices are going to remain depressed.
It’s going to be an interesting summer.