Opinion Sur
After a dry and warm summer, the illusion was globalized that fall would bring a little more tranquility regarding Europe, its markets and, above all, the economies most affected by the crisis. This wave of optimism, which characterized August and the beginning of September, had its origin first, in the firm declaration of the President of the European central Bank, Mario Draghi, who pointed out that ‘in spite that the economy will fall in Europe in 2012, the euro is invincible’, followed by the decisive defense through the sovereign bonds purchase program announced by the ECB for those countries that were to explicitly request it.
This measure has a precise goal and its implementation a direct effect on the sovereign debt crisis burdening several European countries: contributing with the governments that request it to lower the risk premium and, therefore, the interest rate with which they allocate their sovereign bonds. Consequently, the sovereign bonds purchase program in the primary market by the ECB injects liquidity and acts as a ‘firewall’ regarding the progressively more frequent speculative attacks against the economies that are most affected by the crisis, mainly Spain and Italy. At the same time, setting a limit for the interest rate to which governments in the Euro Zone issue their sovereign bonds has a relevant fiscal and budgetary effect given the enormous volumes of indebtedness. This month Italy reached a new debt record of 1972 trillion Euros.
But this country ‘bailout’ is not free of charge for the governments that request it. First they must publicly affirm their incapacity to control the economy and fundamentally the lack of confidence of the capitals market in their management and the generation of trust. That is the reason they are reluctant to ask for the aid the ECB is offering them.
The mere enunciation of the program had an immediate and favorable response from the markets. At the beginning of September Spain and Italy’s risk premium lowered considerably and, consequently, the interest rate demanded by the market for their allocation of sovereign bonds. Even Greece was able to allocate 1360 million Euros that week with decreasing interests. It seemed that the crisis had found a new course. With this evidence in hand, Brussels and the ECB itself initiated, and still exercise, strong pressure, mainly to get them to adhere to the bonds program.
The optimism atmosphere grew after Draghi’s announcement, when the German Constitutional Court authorized the set in motion of the European Stability Mechanism (ESM), that is a fund initially counting with 500 trillion Euros, which will be able to lend money to countries in difficulties, with the previous approval on behalf of the European authorities of the ‘bailout’ requested by any of the economies in trouble. It will be possible to buy debt from a State in the primary market (an emission) and also in the secondary market (where titles in circulation are exchanged). The ESM should have been effective as of July 1st but it suffered a delay awaiting the German Constitutional Court’s decision; projections point to its application in October. In fact, the President of the Euro Group, Jean Claude Juncker, has convened a meeting for October 8th and it has generated great expectation after the German Government, leaded by the President of the Bundesbank, denied the ESM to join efforts with the ECB to strengthen the ‘firewall’ power of the bonds purchase program.
Anyway, countries in severe crisis like Spain, despite Brussels’ and the ECB’s pressure, resist requesting the ‘bailout’. The fact is that in the process of negotiation between Draghi and Juncker, backed by Hollande, Monti and Rajoy, with Germany and several Nordic countries, the cost of the bailout becomes higher for the country that requests it. As Olli Rehn, Vice-president of the European Commission warned ‘the Euro Zone States in trouble that request the European bailout funds to purchase sovereign debt will be bound to strict conditions’. It is hard to imagine what additional conditions can be demanded from countries like Spain and Italy which are in recession, with predictions of negative growth for this year and going through record unemployment and indebtedness levels.
Simultaneously, in the same countries voices rose in regards to bailout funds not being able to be accessed until an appropriate supervision mechanism was in play, crucial requisite to move towards the Banking Union, an essential supplement for the Monetary Union and the Fiscal Union already pointed out as a priority in the last Summit of European leaders. According to Draghi ‘the ECB is ready to carry out the supervision of bailout programs’ strict and effective conditions’ and, therefore, on October 8th the ESM has to become effective and consequently make the resources available to initiate the purchase of sovereign bonds together with the ECB, previously requested by a Member State and after having agreed on the conditions demanded by Brussels.
These negotiations and controversies lead to Draghi’s initial statement to turn substantially from ‘we will do all it takes to save the States in crisis and preserve the Euro’ to a situation that in order to qualify for the ECB and the ESM’s aid, countries must request a formal bailout, agree to concomitant conditions and having their request approved by the rest of the Euro Zone, including the fiercely austere Germany and several of the Nordic countries. Draghi’s position, a result of the search for the paralyzing European consensus, along Angela Merkel’s statements that the ESM will not be operational until the end of the year due to the supervision mechanism it is associated to taking a few months to be properly structured, diluted Draghi’s first statements’ decisiveness and, consequently, the optimism wave with which the European fall had begun. The evidence that there will not be immediate actions to break the pressure in markets against Spain and Italy has disappointed investors.
Spain bleeds out in the controversy. Domestic and foreign pressures grow with each passing day upon Rajoy to request the ‘bailout’. His social and politic situation becomes grimmer every day and his next sovereign bonds emission will bring them back to the costs previous to the summer. Europe has fallen again into depression, social protests and increasing capital flight. It is hard to predict what will happen in the next months of the year with the Euro Zone and with the Euro.
In my opinion, there is a schizophrenia that has taken over the institutions of the EC and several European States: they are daring when it comes to giving loans to banks but not so much when it comes to the States, all on the grounds that if the financial system is not stabilized the crisis cannot be exited, which is partially true. The idea that if credit is not reactivated then the economy is not reactivated is valid in a situation of normal cyclic depression, but it is not entirely true in a situation of acute crisis, because banks receive the aid and protect themselves materially.
This schizophrenia has placed banking stabilization and the Banking Union at the top of the community agenda and when an idea such as Draghi’s emerges, clearly oriented to help the States as it was initially outlined, it is diluted, weakened and postponed. Not to mention the ideas that came up during the last Summit regarding growth through orienting funds towards infrastructure and public work projects to reactivate employment and economic activity. On the contrary, the budgets presented by several States in these past days, including France, get greater savings from the cutbacks in infrastructure.
This year it is already foreseen a decrease in the product’s growth between 0.2 and 0.6 percent. It remains to wait for the meeting of October 8th to formalize the ESM, for it to get a banking license from the ECB to purchase bonds and the available resources to be reinforced, the supervision mechanism to be streamlined and for Spain to request a ‘bailout’ that is socially and politically sustainable. In addition, for the Greek drama to ease, once the Troika reports and the rest of the Euro Zone States agree to postpone the deadlines imposed to reduce the deficit and implement the demanded structural reforms. In this sense, Samaras managed to agree on savings measures that amount to 13.500 million Euros with his Government partners, the Pasok social democrats and Dimar’s center-lefts.
To complete such a complicated state of affairs, the Banking Union has entered a dark patch. Just as they stated this past Tuesday in a long and decisive press release issued by Berlin, Helsinki and Amsterdam, in the next months difficulties will come since they will not go easy on the calendar and design of the new supervision institutional architecture Berlin seeks to implement, backed by that old and persuasive argument, ‘the one paying makes the rules’. That reluctance will be the overall atmosphere but the three countries also informed of several particular cases: especially that the banking supervision will not be ready until after January and without it neither will the direct recapitalization of banks on behalf of the bailout mechanism. This is fundamental for Madrid, who thought that the direct banking recapitalization on behalf of the bailout mechanism would have retroactive effects. Madrid still trusts the banking supervision will come in January and keeps injecting money in its banks, which implies the debt that injection generates will have to disappear from Spain’s balance and go to the bailout mechanism’s. The past September 28th, the Government along with a consulting company revealed that the financial Iberian necessities amount to 59.300 million Euros of extraordinary capital to face a serious crisis (a 6.5% contraction in Spanish economy between 2012 and 2014). From this necessities will emerge the figure the Spanish Government must have to recapitalize its afflicted banking sector.
The tension over the Euro will prevail for the next months and the markets will reflect it with great volatility.
