Guest post. Translated from the French by Tim Gupwell
Once again, the European stock and bond markets have sounded the alarm. The fall in stock values has been accompanied by an increase in bond rates for the countries in the firing line. The capacities of the banks and of the states to fulfill their commitments are being simultaneously called into question.
For the time being, the means of supporting those who need it are just not there, and it is hoped that Italy does not go down the same path. Patience is needed because the ESM is not yet close to being operational. It is not possible to establish whether the decisions have already been taken to attempt to sacrifice a part of it as a means of preventing the flames from spreading further, or if it is simply a matter of indecision and disarray winning the day. In Germany, public declarations have been blowing hot and cold, though more often cold over recent hours. Whatever it is, waiting is not a viable policy, just a temporary solution.
Faced with a 20th August deadline, the date on which the bonds held by the ECB come to a term, and waiting for the delegation of the Troïka (due to arrive in Athens on Thursday) to file its report and take a decision as to whether the second installment of financial aid is to be paid, the Greek Government will be allowed to issue bonds of less than a year’s duration which will be purchased by Greek banks and accepted as collateral by the ECB.
An interim solution is also to be envisaged for the Spanish, with the Minister Luis de Guindos travelling to Berlin on Wednesday in an attempt to get it confirmed. This would involve making alternative use of a part of the 100 billion Euros which has been set aside for saving the banks, something which the Germans have refused for the moment. It could be used for example to finance the funds set up to bail-out the Spanish regions, with those advocating this approach, notably the Spanish themselves, claiming that less stringent interpretations of the memorandum adopted by the Ministers would allow this.
In veiled terms, the Minister has also called for the ECB to resume its bond purchases of Spanish securities on the secondary market, as Spanish banks are struggling to subscribe to issues and which cannot be put back indefinitely. Having been used heavily in Spain and Italy, this mechanism is encountering its limits. Even though the banks are able to use these securities as collateral for the ECB – which does accept them – it discounts their value to protect itself against potential depreciation from the continuing increase in rates. It is this depreciation which is affecting the banks, unable themselves to resort to the same tactics.
In the meantime, Mario Monti has been keeping busy and has been attempting to find the kind of support from Vladimir Putin of Moscow which he is unable to find in Europe. His objective is to set up joint ventures between Italian and Russian enterprises in a wide variety of different sectors, to prevent Italy from sinking into an economic depression, especially given the lack of substance to the European projects to support growth. Like the Spanish regions, the Italian municipalities are also undergoing a financial crisis. More than ten Italian towns with more than 50000 inhabitants, including Palermo, Turin, Milan and Naples are considering asking the Corte dei Conti for the authorization to carry out an orderly default. Alessandria has already done so. Silvio Berlusconi, who continues to manœuvre behind the scenes, is defending the idea of a two-currency system, with the Lira inside Italy, and the Euro destined for any exchanges with the exterior.
By proclaiming that « Europe is not in any danger », the interview given by Mario Draghi at the end of the week to the newspaper Le Monde kept all the options open. It was also an opportunity to make the declaration that “we are very open and there are no taboos”, in an attempt to be reassuring. With the IMF deliberately keeping a low profile, due to the internal pressures which have been exposed, the ECB remains the savior of last resort whose intervention is hoped for. But that has not yet been decided upon either.