Posted by: David Tweed on January 30, 2012
As EU leaders gather for a summit this afternoon in Brussels, people are asking if Europe is stepping back from the precipice and moving into a more chronic phase of the debt crisis.
My response is not yet, but we may be getting close.
First we need the private holders of Greek debt to sign an agreement to write down the value of their holdings that doesn’t trigger a messy default that Josef Ackermann of Deutsche Bank (DB) told my colleague Caroline Connan in Davos would have dire consequences:
The signals coming from Athens are positive that private creditors will accept a deal that meets with the guidelines set out last week by Jean-Claude Juncker, who speaks for the euro zone finance ministers.
Analyst Han de Jong of ABN Amro wrote today:
Greece remains the wildcard. A breakdown of the PSI negotiations, and, or the failure to secure a second bail-out has the potential to lead to a re-escalation of tensions. We expect a deal to be reached because the consequences of failure will sharply focus minds.
After that Greece should get its next allotment of European Union and International Monetary Fund cash so that it can make its â‚¬14.5 billion bond repayment scheduled for March 20. Whether Greece’s remaining debt load is sustainable is likely to haunt us into the second quarter.
By then, Angela Merkel’s fiscal compact imposing budgetary and fiscal discipline on euro zone countries should be signed, opening the way for an agreement to beef up the firewall against contagion by increasing the size of the rescue fund.
Problem is that may be too late to convince the members of the Group of 20 nations meeting in Mexico at the end of February to increase their contributions to the IMF as part of an international effort to make sure adequate funds are in place to ensure European fiscal stability. U.K. Chancellor George Osborne says he’d only approve of more British cash if he sees a bigger EU commitment to its rescue funds.
I suspect by then Germany may give into pressure from Italy, France and Spain and signal it is willing to beef up the rescue fun—or at least end its opposition to allowing the temporary fund run alongside the permanent fund.
This week will provide another signpost on whether we are entering a new phase in the crisis: â‚¬22 billion ($29 billion) in bonds sales are scheduled for euro zone countries. The results may be the best indicator of whether the crisis has turned the corner.
(Photograph by Jock Fistick/Bloomberg)