SERIOUS MONEY:THE WORLD'S stock markets delivered their best monthly performance in several years during October. The dead- cat bounce – off a deeply oversold condition – is not hard to understand in the context of stale bulls, that had little option but to follow their words with action, once it became clear that the much-feared double-dip recession in the US was not set to materialise just yet.
Last week’s “summit to end all summits” among Europe’s political leadership added fuel to the Halloween bonfire but, just as the misguided optimists sharpened their pencils to scribble more of the same misplaced bullishness – that has become something of a trademark over the last 10 years and more – the witching hour contrived to inject a dose of reality into proceedings, that effectively removed the gloss in a single trading session.
The outgoing president of the European Central Bank, Jean-Claude Trichet, called for “swift implementation” of the summit’s proposals in order to restore financial stability across the monetary union but, George Papandreou, the Greek prime minister, had other ideas.
The beleaguered politician stunned financial markets when he unexpectedly announced on Monday night a referendum to approve the latest bailout package for his austerity-struck country.
Subsequent events served to confirm growing suspicions that Greece is becoming increasingly ungovernable and spiralling out of control. Indeed, riots and violent demonstrations have become a regular occurrence in Athens and other cities in recent months while civil servants increasingly refuse to implement austerity measures.
The increased social tension is not difficult to understand when viewed through the lens of the prevailing depression-like economic conditions that are a direct result of the austere and ultimately self-defeating policies imposed by the troika.
The economy has already endured three consecutive years of recession and is expected to have suffered a cumulative decline of 15 per cent by the end of next year. The collapse in domestic demand has seen the unemployment rate exceed 17 per cent in recent months – eight percentage points above its historical average – and unions warn that the rate is likely to surpass 20 per cent next year.
Furthermore, the youth unemployment rate has more than doubled over the past three years and could well exceed 45 per cent in 2012.
The latest bailout deal for the downtrodden nation envisages a 50 per cent haircut on government debt held by private-sector investors, which is viewed as generous across most of Europe but, to the ordinary Greek citizen, it simply means more hardship without any light at the end of the tunnel.
Indeed, official projections show that even in the unlikely event that the austerity programme proceeds according to plan, the Greeks can still expect to have a public debt- to-GDP ratio not much below 120 per cent in 2020. Given realistic assumptions, the Greek economy is unlikely to recover its pre-recession peak until early in the next decade or perhaps even longer.
Opinion polls suggest that the Greek public would almost certainly have rejected the latest bailout deal in a referendum, even though the majority of citizens are in favour of euro membership. Should the current crisis escalate even further, the country could default on its debt, which would trigger credit default swaps and crystallise losses across the European banking system.
A resulting credit crunch and region-wide recession could well prove to be the monetary union’s undoing.
Of course, the government must first survive today’s confidence vote, which is far from assured given the rapidly eroding majority that Papandreou’s Pan-Hellenic Socialist Movement (Pasok) party currently holds. A defeat would precipitate further uncertainty and possibly even a default, as current IMF rules stipulate that it cannot disburse funds to a country without a government.
Even a successful resolution of the Greek issue cannot ensure a satisfactory outcome for the euro zone. Indeed, contagion has long since moved beyond Portugal and Ireland to Italy, where the public debt-to-GDP ratio sits uncomfortably close to 120 per cent, the second highest in the euro zone after Greece.
There are several factors that suggest Italy does not face the same solvency issues that confront the troubled periphery, but the yield on 10-year government debt continues to edge higher and, at 6.3 per cent, has reached levels that threaten to undermine the sustainability of the Mediterranean country’s debt position.
The euro zone continues to lurch from one crisis to the next. The 14th meeting to bring the crisis to an end failed to live up to its billing as the “summit to end all summits”, once the Greek prime minister had announced that the latest bailout deal would be put to the people.
The euro crisis is rapidly approaching its end-game but, recent developments suggest that a happy ending is becoming increasingly unlikely.
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