LONDON: Europe is once again in turmoil, and once again it seems as if a last-minute compromise is likely to stave off what many are calling Europe’s Lehman moment.
The latest news seems to suggest that the IMF will agree to release its next tranche of e12 billion by Sunday, at the earliest, even as Greece’s prime minister struggles to get parliamentary vote to pass a draconian e78-billion ($110 billion) five-year package of budget cuts and asset sales.
Markets were roiled on Wednesday as George Papandreou said he would name a new government and call a vote of confidence as he seeks to pressure rebel lawmakers to back an austerity plan that would secure a new bailout. The MSCI World Index fell a further 1.1% on Thursday, while the Swiss franc rose to a record against the euro.
Citigroup analyst Jurgen Michels said in a report: “We reckon the government will probably win Sunday’s confidence vote, although we acknowledge the risks of a negative outcome have increased, especially given the heightened level of social protests. However, we think it is in no-one’s interest to go to early elections at this point.” As political pressure and increasing social unrest mounts on Papandreou, markets spooked that he would be unable to control Opposition in his parliament.
Adding to the woes, Standard & Poor’s slashed Greece to CCC from B, handing the nation the world’s lowest credit rating and noting it’s “increasingly likely” to face a debt restructuring.
Nouriel Roubini, arguably one of the most influential economists today, added fuel to the fire in an article recommending that “outlier” Eurozone members should exit the Euro and return to national currencies.
European economists don’t all agree. Speaking a few days back, Stephen King, chief economist of HSBC, pointed out that allowing even one country to leave the Eurozone would set a scary precedent, and create even more uncertainty. Ian Gomes of KPMG London pointed out that the solution will not be economic, but political.
“Germany and France have far too much invested in the Eurozone. There is no way they’re going to let it break up,” he said, dismissing the Lehman moment theory. So far, Europe and IMF’s handling of the PIGs issue has more or less been more political than economic, which may explain why the ECB and German authorities are now at variance. S&P, according to senior market participants, is as usual a bit late in the day with its analysis. The Greece would have to default and restructure its debt, sooner or later is a reality that most senior bankers have accepted for months. “It’s not illiquidity, it’s insolvency,”
German banker told ET some time ago. “Other countries have defaulted before, Argentina, Russia, it’s not the end of the world,” another observer told ET.