Stringent bail-out terms laid down by Troika
Despite continued violence in Greece during mass demonstrations and a 48-hour general strike, Parliament in Athens passed a bill on Thursday introducing further austerity measures to meet the stringent bail-out conditions laid down by the Troika composed of the European Commission, the International Monetary Fund and the European Central Bank.
Anarchists and Left wing supporters including several trade unions members battled it out on the streets of Athens and a man died as a result of the scuffle. With this backdrop of human anger, distress and anarchy, the Troika delivered its latest report to the beleaguered government in Athens. The report calls for a rapid financial package for Greece, and warns that the country is on the verge of bankruptcy. Greece should receive its sixth bail-out package of 8 billion Euros as quickly as possible, the report emphasises.
However, the IMF did not append its signature to the report saying it would “continue to examine the progress made by the country.” The absence of the IMF signature immediately alerted investors and markets to dissent within the Troika and had a subsequent roll-on effect on markets which registered a sharp fall on Thursday before shoring up somewhat by the end of trading.
The 106-page report describes a country plunged into a deep, long-term crisis whose “debt dynamics remains extremely worrying.” Almost all the country's economic indicators are red, except perhaps for exports which showed a 20 per cent rise. On the negative side, GDP is expected to shrink by 5.5 per cent in 2011 and medium term growth prospects will have to be downgraded even further.
Even as the Greek crisis deepened, France and Germany failed to agree on ways to strengthen the European Financial Stability Facility (EFSF) further fuelling fear and speculation. French President Nicolas Sarkozy and German Chancellor Angela Merkel decided on Thursday that under the circumstances the agenda of the 23 October could not be respected. The EFSF will therefore quite likely not be discussed at the meeting but will be the subject of another summit next Wednesday.
“We are really on the edge of the precipice. Why do you think the French President went to Frankfurt to meet Ms Merkel and representatives of financial institutions despite the fact that his wife was in labour?” the French newspaper Les Echos quoted a French negotiator as saying.
Paris accuses Berlin of refusing to transform the EFSF into a bank which would allow it to have greater access to liquidity from the European Central Bank. Berlin also refused to guarantee a part of the debt of countries facing sovereign debt problems. Berlin suspects Paris of wishing to use the Facility to its own advantage given the fact that France has just received a ratings warning from Moody's which has placed the French economy under surveillance.
The rules are clear, Mrs Merkel pointed out: allowing the EFSF to draw funds from the ECB would amount to a violation of EU treaties. She also refused to guarantee debt since that would place an unfair, undue and unbearable financial burden on Germany making it the guarantor of last resort. Under new German jurisprudence, the government has to consult parliament on major financial outlays and the German opposition is dead set against bankrolling the Euro. “France wants more money from Germany which we are not ready to give,” said conservative German MP, Otto Fricke.
“The German government needs a decision from the Bundestag or at least its finance commission. These are the new rules since September and the rest of Europe must get used to that,” said Volker Kauder, the President of the Christian Democrat group in the Bundestag.
The most pressing questions for European leaders are that devising a plan for Greece which would also prevent a domino effect on Italy and Spain and the recapitalisation of European banks which require a minimum of €100 billion.
One of the solutions for Greece could be a wiping out of 50 billion from its debt which would have an immediate effect on banks, especially French and German banks which hold a large percentage of Greek sovereign debt.
But what if no agreement is reached on Saturday (at a specially convened meeting between Sarkozy and Merkel) or on Sunday during the EU summit? A supplementary summit has been convened next Wednesday to meet just such an eventuality. Berlin has been suggesting that the EFSF could be used for servicing the sovereign debt of defaulting countries but this proposal too does not have unanimous support within the Euro zone. A failure to find a solution to the Euro crisis will place Europe and particularly France, the host nation, in a difficult position at the G20 summit which opens in the French city of Cannes in early November.