Jitters about the euro zone have roiled financial markets this week, sending the rand reeling and causing foreigners to dump SA bonds. As Spain and Greece move to the forefront of concerns about the global economy, the million dollar question is: How will these countries’ problems play out?
The so-called Grexit — a term coined by Buiter — would most likely take place by early 2013.
The renewed fears about a euro zone break-up may come as something of a surprise for those who thought that the last summit by European leaders at the end of June had agreed on a package of measures that would avert a crisis. But it seems that was a false dawn. The devil was in the detail of the plan, and the euro zone leaders also didn’t foresee that its economic growth assumptions for countries in deep fiscal crisis such as Greece were far too optimistic.
There’s a school of thought that says that Greece’s new creditors, led by Germany, have written the country off and have accepted that it will leave the euro zone. The so-called “troika” of creditors – the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB) – are in Greece this week to assess whether it deserves to get the next tranche of funding. Greece has to meet certain reform requirements to get the funding, and common cause is that it hasn’t met these conditions.
The beleaguered country will have to refinance billions of euros worth of government bonds in less than a month and requires international assistance — which may not be forthcoming — to repay the money. International inspectors arrived back in Greece on Tuesday to assess the country’s austerity program with European officials warning that it was “hugely off track.” David Cameron is now receiving daily written updates on the deteriorating situation and was warned earlier this week that a Greek bankruptcy in the next month is now a serious possibility.
The only trouble with that argument is that there would be a run on Greece’s banks as depositors try to get out euros before the lesser valued drachma is introduced. A full-scale Greek banking crisis would be virtually unavoidable. However, the Greeks may be forced to deal with it, as it seems equally unavoidable that they will be able to meet the troika’s requirements for cutting its budget deficit.
The end game for euro zone: the rest of the member countries stay put, while the sovereign debt of Portugal, Ireland and maybe Italy, Spain and Cyprus get restructured.
For all periphery countries, the current mix of fiscal austerity and supply side reform will fail to achieve a return to a sustainable fiscal path.