On Wednesday, October 26th, 2011, at the Euro summit, which took place in Brussels, Euro zone leaders and private creditors agreed to take a 50% debt write-off on the Greek government bond holdings. In addition to that, a second bail out loan/package for Greece was revised to a total value of 130 billion euro, up from 109 billion that had been agreed on July 21st, 2011 (see globalopinion.pl – ‘The ongoing Euro zone crisis’. 01/08/2011). The euro area member states will contribute to the private sector involvement package up to 30 billion euro.
On September 18th, 2011, we wrote ‘The July’s deal is not adequate (in July 2011, Euro zone leaders sanctioned a 37 billion euro default on the Greek bonds). A write down on the value of the Greek debt should have been up to 80%, if one wants Greece to be able to pay back the money sustainably’ (see globalopinion.pl ‘Greece and the Euro zone debt crisis’ 18/09/2011).
After two months and another deal, which is labelled by the French President Nicolas Sarkozy and the German Chancellor Angela Merkel as a ‘comprehensive package’, we can say again: this deal is not enough; write off on the Greek debt should have been at least 80%.
BNP Paribas, France’s biggest bank by assets, is the bank most exposed to the Euro zone sovereign debt. Recently, the French bank wrote down 60% of the value of its Greek bond holdings against the 50% mandated under the latest EU plan to constrain the Euro zone debt crisis.
Writing off half of the Greek debt should reduce Greece’s debt-to-GDP ratio from 160% to 120% by 2020. However, it is still far above what is regarded as sustainable. Let’s remind that the Maastricht’s fiscal rules require a primary deficit and a debt ratio to not exceed 3% and 60% of GDP, respectively.
In the coming months, the Greek people would be asked by international institutions and creditor countries to ‘squeeze’ even more. More severe fiscal austerity measures will have to be implemented, if Greece wants to get money from a bail out programme.
However, the austerity measures implemented in Greece so far haven’t improved the economy at all. On the contrary, spending cuts and higher taxes have only impoverished the Greek society as a whole. The Greek national output is already more than 9% below its 2008 level and industrial production is 23% down. It’s estimated that the Greek economy would shrink further by at least 5% in 2011. There are no jobs available. The unemployment rate has soared to 17% and it’s predicted that it could reach 20% in 2012.
After providing a financial aid to Greece, Ireland and Portugal, the European Financial Stability Facility, the 440 billion euro single currency’s rescue fund, has only 250 billion euro available. During the Euro summit in Brussels it was also agreed that the EFSF would be strengthen up to around 1 trillion euro. The euro zone leaders assume that stronger EFSF would create a credible firewall to protect endangered but solvent countries like Spain and Italy.
Some analysts assume that Italy with its total public debt of 1.9 trillion euro would follow Greece, Ireland and Portugal in seeking bail out loan/package. Italy’s debt problem looks very serious. Recently, the yields on Italian bonds rose to 6.4% with the spread over German Bunds reaching a euro-era high. It’s assumed that yields on bonds at the high of 6.5% are unsustainable. Therefore, some financial analysts say, it’s only matter of time when Italy would be forced to ask for an international financial assistance.
Moreover, the government of Silvio Berlusconi is regarded as unable to pull Italy out of financial difficulties. On Monday, 19th September, 2011, Standard and Poor’s (S&P), a credit rating agency, downgraded Italy’s rating by a notch to A with negative outlook. The Italy’s government bond rating was slashed, because of weakening economic growth prospect and political uncertainties within the ruling centre-right coalition, which would limit the Italian government ability to resolve the fiscal problems. S&P also cut its forecast for economy growth in Italy to an annual average of 0.7% for each year until 2014, from its previous estimate of 1.3%.
On Tuesday, 4th, 2011, Moody’s, a credit rating agency, also downgraded Italy’s ratings by three notches to A2. The downgrade reflected a lack of confidence in Mr Berlusconi’s centre-right coalition to pass reforms needed to boost Italy’s stagnant economy.
On Friday, October 14th, 2011, Mr Berlusconi put the fate of his government and his own political future on a confidence vote after he was humiliatingly defeated on the approval of the 2010 public accounts. He won the confidence vote by 316 votes to 301.
Berlusconi wanted an outright majority to show the Italians that his government could continue to govern. However, the confidence vote has showed that he has a majority of just one in the Chamber of Deputies (the lower house of the Italian parliament; it has 630 seats).
Italy needs structural reforms, which would stimulate economic growth. Unfortunately, the Italians have the government, which is unable to implement reforms and the opposition, which has no firepower to oust Mr Berlusconi and form a new and efficient government. This is not good news for Italy and the Euro zone.
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