OK, so given the significant part they played in the financial and banking market crisis that we have muddled our way through I have significantly less respect for rating agencies than I once did. But given the manner in which the EU has over the past few days shot itself in the foot in the disgraceful handling of the Greek sovereign debt issue you can hardly blame S&P for downgrading this to junk status. The bottom line is that S&P fears default by Greece may now be only a matter of days away!
In the wake of junk status downgrade – the first time this has occurred to the sovereign debt of any Euro member state since the unified currency was founded twelve years ago – the worsening situation in Greece has not surprisingly seriously impacted on global market confidence. Notwithstanding the seriousness of the Greek sovereign debt situation one is bound to wonder whether the Greek drachma might soon be stirring in its grave! Possibly it could but don’t count on it yet. Nevertheless, we should not rule out any scenario that might suggest Greece could depart from being a Euro member state ultimately although we doubt away from the EU. Whilst the situation in Greece and arguably in some other EU member states has been an accident waiting to happen a distinct lack of available support from both the EU and ECB, the lack of experience and preparedness how to handle a situation such as this, the lack of engineering and of mechanisms to make things happen quickly, the distinct lack of leadership plus complete lack of respect shown by the EU to the international economic community leads me to suspect that heads may yet role in the EU. Indeed they should and no lesser head than that of the EU President.
Meanwhile unless the EU and IMF can together pull something out of the hat in hours or that individual Euro member states choose to intervene on behalf of Greece maybe over the next few days the damage done to the EU and the Euro in my view could just be irreversible. Bad enough then that we almost have a potential repeat of the Argentina default crisis to cope with but worse is that the contagion affect of all this will now spread much faster than it otherwise would have done to other Mediterranean states such as Spain and before that, poor old struggling Portugal. All this thanks to EU ineptitude and that could if arrogant attitudes had not been allowed to hold sway could have been avoided.
When I first heard at 04-30am this morning whilst preparing for a regular newspaper review that EU Council President, Herman Van Rompuy was proposing to call a meeting of Euro member state heads on May 10th as opposed to say for later today I readily admit to going into an immediate rage. My first thought was that I was watching a man in Van Rompuy who quite frankly did not have a clue of the seriousness of the situation let alone of how financial, debt and stock markets work. My second thought was to remember the now infamous words used by UK Prime Minister James Callaghan back in 1979 as he faced up to a very serious bout of industrial strife – ‘Crisis? What Crisis?’ In the end rather than be restrained by colleagues at the BBC and before going on air with a newspaper review I had little choice but to take the view that the behaviour of the EU and particularly that of its Council President has been nothing short of ridiculous.
What galls most is that the rhetoric behind the supposedly agreed EU/IMF bail out announcement last week had absolutely nothing behind it. OK, so this wasn’t just plucked from the air, it was a figure that the various EU partners plus the IMF essentially agreed with strings attached. But given that there is apparently a complete lack of infrastructure and mechanism in the EU that could allow any bail out to occur within any short time span in the end the so-called agreement was in effect worthless. Call it ignorance or arrogance what we are seeing today across world markets in the name of Greece and yet ready to pluck Portugal and Spain and carry them in its wake was never supposed to happen to an EU state let alone a member of the Euro currency. Indeed the Euro was arguably set up to ensure that there would in future always be a degree of shared currency protectionism. As I say, sadly there is currently no mechanism that allows a large scale bail out such as this to occur apart from action from the ECB should its council deem this appropriate. There is of course no guarantee that it would do that.
Meanwhile by prevaricating all through the proposed bail out process partly because of upcoming regional elections in Germany it seems that German Chancellor Angela Merkel may have been inadvertently walking through a minefield that she probably was not aware – the point being that if Greece defaults German and French banks hold Greek bonds in their zillions and it just may be that one of the banks might fail.
My understanding is that Greece needs to pay back EUR9bn of maturing debt by the 19th of May and it is just possible that in the absence of the machinery of the previous EU/IMF (the IMF have said I understand that they may be prepared to increase the EUR10bn share of the EUR45bn Greek loan package if required) the ECB or indeed individual EU member states might come to the rescue. In fact in the absence of that support I see little option but that Greece will be forced to default and this is the situation that I now consider most likely. Arguably as Greece will need to pay back around EUR85bn of debt during 2010 and just shy of double that amount over the next two years) avoiding default was always going to be very difficult.
Other dangers that spread out from the contagion of this latest crisis of confidence cannot be ignored either. Markets dislike uncertainty and until they see a workable strategy for the Greek economic mess and that the likelihood of defaults occurring in Portugal and Spain have subsided they are unlikely to rest. Meanwhile and as intimated above, Germany’s Chancellor Angela Merkel who has for decent enough reasons of stealth led the pack of those worried about the ability of Greece to bring down the government deficit and who as I say faces regional elections next month these are not particularly good times. Although her part in this extraordinary crisis may not be nearly as bad as that of M. Van Rompuy it may well be one that comes back to haunt her. Why? Well if Greece defaults that means the pressure will then be felt and exerted on national banks that hold the Greek debt. That includes very many German, French and Swiss banks and it just may be that with so many banks involved one of these might just go down. Who then picks up the tab – in the absence of an agreed and workable system that ensures financial and banking market stability and taxpayer protection governments do!
