AS GREEK premier George Papandreou clings to power, EU leaders are desperately trying to stitch together a deal this weekend to release €12 billion to the country to avert a threatened default in July.
The escalating political drama in Athens, accompanied by violence on the city’s streets, raises grave new doubts over Europe’s capacity to continue supporting the country.
With Papandreou facing a confidence motion within his own divided Socialist party on Tuesday, the negotiation of a second rescue plan has been put off until next month.
Some reports yesterday suggested that Germany doesn’t want to lock in to any new arrangement until September, raising the spectre of prolonged uncertainty over the viability of the Greek rescue plan all summer. A person seeking to invite crisis couldn’t invent a better plan.
In the European arena, the scene is characterised by acute anxiety and conflict as Germany and the European Central Bank battle it out over the principle of private creditor participation in any new bailout. News from Washington that Minister for Finance Michael Noonan was proposing a fresh effort to torch unguaranteed senior bondholders in Anglo Irish Bank only added to the sense of unpredictability.
An internal note leaked to the BBC suggests Wednesday’s meeting of the European Commission was marked by “profound foreboding” over Greece and the future of the euro zone itself. Commission chief José Manuel Barroso was held to be “clearly more worried now than he was a year ago when the sovereign debt crisis first broke”. The note was written by an official who observed the engagement.
Although insiders in Brussels dispute some of the writer’s assessments, the document points to grave concern in Europe’s top echelon. Not only is Greece exercising minds, but so too is the very future of the euro itself.
This brings us back to the early phase of the Greek debt explosion, when a reluctance to countenance a bailout threatened to disintegrate the fringe of the single currency system.
Political chaos in Athens only intensifies the complexity of the European debate over the prospect of debt restructuring for Greece. Germany is pushing this agenda with vengeance, arguing political support for a second rescue cannot be achieved without it. The ECB resists, fearing any default could prompt a wider catastrophe.
For hours on Wednesday afternoon as European officials worked the phones to Athens, the story went that Papandreou might offer his own head on a plate if that was the price of the main centre-right New Democracy opposition joining a government of national unity. By nightfall, after talks with the opposition broke down, Papandreou was proposing a cabinet reshuffle and a confidence motion. It is difficult to see how such confusion could reinforce what is left of his international credibility.
That is crucial, given the depth of the ambivalence in Germany, Finland and the Netherlands over new rescue aid for the country.
Enter Michael Noonan, reviving proposals to compel Anglo’s senior bondholders to bear losses as the former bank is wound down. The move came as a surprise in Brussels and in Frankfurt, home of the ECB’s hardline opponents to senior bond “haircuts”. Only one day previously, Noonan had expressed support for the ECB in its mammoth struggle with Germany. Now he was swinging the other way, albeit with proposal for a strictly limited recourse to a small category of senior Anglo creditors.
Similar moves have already been ruled out several times before, raising questions as to why Noonan moved when he did. From Dublin’s perspective, the Minister’s declaration keeps the Anglo bond question simmering while Europe frets over private investor participation in the Greek bailout. In Europe, however, the Minister was privately faulted for poor timing.
Greece’s immediate problem is the International Monetary Fund cannot release its €3 billion portion of the coming €12 billion until there is certainty over the country’s 12-month funding outlook. That question won’t be fully resolved until a deal on a second bailout, still a remote prospect at this point.
While a short-term fudge may be found via a political declaration of intent to intervene if necessary, the history of the debt crisis shows that promises seldom engender confidence on the markets. The turmoil continues.
