17 eurozone leaders will meet at 1 p.m. tomorrow in Brussels to discuss the details of a second Greek bailout.The fate of the euro rests in the balance.
Here’s what you need to know:
– The big kahuna on the table right now (at least according to Bloomberg) might be a plan to expand the powers of the European Financial Stability Fund to lend some €440 billion ($626 billion) to recapitalize Greek banks. The plan could include extending IMF credit lines to bolster countries like Italy and Spain, which — though teetering near the precipice of disaster — are on more stable financial ground than Greece. Germany has previously refused to support such measures, but might be persuaded to reconsider this time around.
– EU leaders have been split into two camps over debates leading up to this point. Germany and the Netherlands are advocating that private investors take losses, but the IMF and the ECB have argued that any private sector involvement in a second Greek bailout would likely be seen as “selective default” by credit rating agencies. Default would cut Greece off from ECB funding, as the bank refuses to accept defaulted bonds as collateral. Greek PM George Papandreou has promised that Greece will avoid default, but the likelihood is slim that Greece could remain solvent without substantial EU aid.
– Some credible progress needs to be made this time. Markets have been increasingly skittish over the fate of the PIIGS, and Italian and Spanish spreads are skyrocketing. Many EU leaders and investors seem to share this sense of urgency. Greek PM George Papandreou said in an interview Tuesday that the summit “could be a make-or-break moment for where Europe is going.” Economists have seconded his fears. “Ministers must come up with some solution that does not involve postponing once again the difficult positions that alone can solve the fiscal crisis,” Gabriel Stein of Lombard Street Research, as quoted in the The Guardian. “Otherwise the next eruption of the crisis won’t be in the autumn, it is more likely to be next week.”
– However, not everyone shares this sense of urgency. German chancellor Angela Merkel has waxed enigmatic about the progress that will be made. On one hand, she forced EU president Herman van Rompuy to delay the summit, tentatively scheduled for last Friday, because “the pre-condition for such a summit meeting would be that we would be in a position to take a decision and finalise the program on Greece.” She appeared to contradict this sentiment Tuesday when she told reporters that nothing “spectacular” is likely to come from Thursday’s meeting. Instead she advocated gradual steps. But no surprise there; she’s been pissing everyone off lately.
– Euro governments are expected to loan Greece money to recapitalize banking sector, but it probably won’t be enough. Greece’s debt burden is expected to hit 172 per cent of GDP next year, a sum that “may never get paid.” Clearly, no one is about to acknowledge this for fear of exacerbating market jitters. So EU leaders will probably a lot of talk about unity and forming a “United States of Europe.” Maybe they’ll pass something marginally worthwhile, but they’re unlikely to make progress if Germany doesn’t approve.
– The wild card. A popular Irish politician is calling for Ireland to default on its debts ahead of the meeting tomorrow. Independent Deputy Shane Ross — who garnered the most votes in the last election — claimed, “default is not a negative, default is a positive, because believe me, the markets believe it is inevitable.”
Unless something miraculous happens, the fate of the eurozone is pretty grim. Calming the markets at this point would truly require some “spectacular” measure — and a huge helping of luck. The truth of the matter is that Greece is in way over its head, and the first bailout was far too optimistic. While a new plan to expand the powers of EFSF might provide a good short term, it’s probably shy of a long-term solution that would yield a stable fiscal framework throughout the eurozone.
If Greece goes down, Italy and Spain will have a hard time keeping their heads above water as contagion fears mount. As the third and fourth largest economies of the eurozone, the fate of the euro as it currently exists depends upon their solvency. More important even than talking about a new bailout for Greece might be a mechanism to contain problems from spreading to Italy and Spain, particularly since politicians, economists, investors, and analysts are starting to realise that Greek default is inevitable.