There Will Be Blood In The Eurozone16 June, 2011, 2:09. Posted by Zarathustra
Tags: Austerity, Economy, Europe, Greece, Ireland
I would recommend you panic – Hugh Hendry spoke to Jeremy Paxman on Newsnight
BBC obtained a leaked document on the meeting of EU commissioners in Brussels on Wednesday. BBC quoted the author, saying that the markets would “smell blood”, highlighting the gloomy outlook for the Eurozone and the Euro itself. The document highlights the need to bailout Greece, and the failure to do so will leave the entire Greek banking system meltdown, and threaten the European Central Bank.
Of course, I have been quite vocal in my opinion that Greece should ditch Euro and default because the Eurozone is a gold standard for Greece. Stephen Roach has put this more elegantly, as he told Bloomberg that:
Greece has a solvency issue given its current debt overhang and the euro zone officials are treating this as a liquidity issue in providing a never-ending stream of bailouts and that’s not the answer.
However, a default will not be palatable, and it will most certainly trigger runs on banks and sovereigns. And because Greek banks have significant holdings of Greek government debts, a default of the Greek government will require a re-capitalisation of Greek banks, which will probably cost €20bn as Financial Times Brussels Blog points out. On the whole, the situation is pretty dire.
The political turmoil is also unfolding, as the Prime Minister George Papandreou
offers to step down in order to make a coalition government possible refused to resign, but to reshuffle cabinet and seek for vote of confidence tomorrow while Greek protestors gather outside the Parliament to protest against austerity.
On the other side of the troubled periphery of Europe in Ireland, the Irish Finance Minister Michael Noonan is now contemplating the idea of imposing significant losses on senior bondholders of Anglo Irish Bank and Irish Nationwide Building Society according to RTE news. Ireland has turned a banking crisis into a sovereign debt crisis by bailing out failed banks and keeping them afloat. Now the government is essentially seeking a haircut for the bondholders of these failed banks. According to Reuters, this is opposed by the European Central Bank, but they will try to persuade the ECB to approve such plan. Michael Noonan said:
We don’t think the Irish taxpayer should have to redeem what has become speculative investment. I don’t think it should be redeemed at par
Overall, there is no good news in Europe right now. “There will be blood” should be a pretty good description of what is going to happen.
UPDATE: George Papandreou said he will not resign, and will reshuffle the cabinet and form a new government. Sigh, it was like watching Egypt months ago.