Friday, November 4, 2011

Five Minutes To Midnight

Ruh-Roh


Iron Frau (Photo / Michael Sohn / Associated Press): Unser Gott, Bitte Helfst Du Uns

Patrick Wintour and Larry Elliott of the Guardian UK report that the G20 conference in Cannes (usually the place where fantasies of another kind are celebrated each year) has ended in failure.

This matters (For a concise, one-article explanation of why, go here), and as the slow-motion free-fall lurches ahead towards a collapse of the Euro as a common currency and a diminishing of the EU as a political coalition -- both of which online financial commentators have been anticipating -- Wintour and Elliot observed that
A world recession has drawn closer after a fractious G20 summit failed to agree fresh financial help for distressed countries and debt-ridden Italy was forced to agree to the International Monetary Fund monitoring its austerity programme.

Financial markets fell sharply after the two days of talks in Cannes broke up in disarray, amid concerns that Italy will now replace Greece at the centre of Europe's deepening debt crisis.

UK hopes that the Germans would relent and allow the European Central Bank to become the lender of last resort for the euro were also dashed.

On a day of unremitting gloom and yet more market turbulence, the Greek prime minister, George Papandreou, won a late-night confidence vote in his parliament after making a speech in which he promised to start powersharing talks to form a caretaker coalition government...

In a sign that the spread of the debt crisis to Italy could break up the single currency, the [UK] chancellor, George Osborne, admitted the Treasury was undertaking crisis planning for a eurozone collapse.

There had been hopes that the G20 would agree to increase IMF resources by as much as $250B to more than $1T, but disagreements about the wisdom of it, structure, size and contributors to the fund left world leaders forced to pass the issue on to a meeting of G20 finance ministers next February...

Obama, under pressure from Congress, was deeply reluctant to contribute to an expansion of IMF funds... Admitting that he had been given a crash course in European politics, Obama urged Greek and Italian parliaments to take decisive action to control their deficits...

Berlusconi was summoned to a late-night hotel meeting with Merkel, Sarkozy, the IMF director general, Christine Lagarde, and Obama, where he was told that the IMF was to start monitoring to ensure tough austerity measures are implemented. The measures include changes to the labour market, pension reform and the sell-off of state-owned assets.

[French President Nicholas] Sarkozy denied that the demands on Berlusconi represented an IMF coup, saying: "We never wanted to change governments, either in Greece or in Italy. That is not our role, that is not our idea of democracy, but it's clear that there are rules in Europe and if you exonerate yourself from these rules you exclude yourself from Europe."

Berlusconi, facing defections from his own party, insisted he had invited the IMF to offer advice. Berlusconi said on Friday he had rejected an offer of funds from the IMF – "I don't think Italy needs that" – and said his country was more solid than France or the UK...

The EFSF has €440B ($608B) available to lend, of which roughly half is expected to be consumed by bailouts of Ireland, Portugal and Greece. Italy has nearly €2T [i.e., $2.36T US] in debt outstanding.

The European Central Bank has purchased Italian debt since August, but will not carry on doing so indefinitely. The need to bolster the EFSF has led the EU to pursue countries outside the euro zone with surplus cash, such as China [to purchase Italian treasury bonds and finance its debt].

David Randall, in the Sunday edition of the UK Independent, laid out these possible scenarios in the wake of the Cannes G20 conference:

Short term

George Papandreou, having survived a confidence vote on Friday night, must form a new coalition government. This could take about a week, but is already under threat from opposition party calls for snap elections.

Such a move would inevitably delay government approval of the terms of the country's latest international bailout package, worth €130bn. Without those funds, Greece will almost certainly default on its existing loans and go bankrupt next month.

Italy's borrowing costs remain unsustainably high, and the contagion effect of any further disasters in Greece could mean that Silvio Berlusconi will have to rethink turning down the offer of an IMF loan.

Medium term

If Greece is bankrupted, its membership of the euro must surely come to an end.

The cost of borrowing for other countries would soar, which would almost certainly lead to yet another banking crisis – only, this time, one with the potential to dwarf the catastrophic effects of the Lehman Brothers collapse in 2008.

Already it is unclear how Italy is going to refinance €300B [$336B US] next year, though the IMF is sending monitors to Rome to issue quarterly updates on the country's economic progress.

Spain will continue to slash public spending, particularly if, as expected, the PP opposition party wins this month's election. The party has promised to restore Spain's top credit rating, which will require the acceleration of spending cuts.

Long term

Eventually, France will have to stop providing so much money to the bailout funds. Its top credit rating would ultimately go, the consequence being that the European Financial Stability Facility [EFSF]'s lending capacity would fall by at least one-third.

If the rescue fund drops sharply, the worst-hit countries would lose much of the one source of funding that is keeping them afloat. Should confidence in the French economy fall, that would leave just the biggest, most important eurozone country left in the crosshairs of the crisis: Germany.