Greece and the Eurozone

Published: June 22, 2012
Categories: News Article, Sligo Champion Articles

Marian's Sligo Champion article

So for now we have avoided a GREXIT and averted a SPANIC. In plain English that means Greece is still a member of the Eurozone (GREXIT being the new buzzword for "Greek Exit" of the single currency) while a full scale financial and economic Spanish panic ("SPANIC") has been averted in Madrid.

But only just. In Spain the respite was short lived. On Monday Morning June 18th, Spanish Prime Minister Mariano Rajoy told the world that Spanish banks had received an EU injection of €100 Billion, matters were in hand and he was off to Euro 2012.

Then, before a Spanish player had kicked a ball on Monday evening, the country's borrowing costs were increasing and bond spreads were rising. The injection had not cured the patient, and had failed to stop the contagion from spreading.

More than any other word, the notion of "contagion" currently strikes terror in the hearts of many people. It suggests a merciless, relentless and unforgiving enemy that leaves devastation in its wake. It conjures up images of black death, the Ebola virus or some type of mutant molecule in the very air we breathe. That's the kind of fear that is stalking the Eurozone right now.

One hundred billion Euro - 1,00,000,000,000 to give its full numerical strength - could only contain the contagion for a few hours before it began to spread once more. Why, one might ask? The answer is simple: because Spain, despite contrary early reports, made the same mistake as Ireland. It bailed out its banks, and via this €100 Billion loan, transferred its debts to its citizens. It then conferred seniority on that debt - i.e. made it senior to all other government debt with a commitment that it would be paid first.

So consider if you were a financial institution and you had bought Spanish government debt, in the reasonable expectation that it would be repaid. Overnight a new player enters the market and your up-to-now solid investment suddenly looks a lot shakier. With a €100 Billion loan now ahead of you in the pecking order, you have the awful sensation that somebody has leapfrogged the entire queue.

Overnight, Spanish government debt had ballooned, a writedown or default became more likely, and as sure as night follows day, Spain would have to pay a higher interest rate to borrow money. In the blink of an eye, Spain had become a far riskier prospect. Contagion had spread.

In my last article, I suggested that a Spanish bank bailout would headline one week later. Unfortunately, I was right. I am now suggesting that a full-blown Spanish sovereign bailout will headline within a short space of time, and a proud country with the Eurozone's fourth largest economy (and an unbelievable, heartbreaking youth unemployment rate of 50%) will have to submit to the terms of the dreaded "b-word (bailout)," all because it has succumbed to the "c-word": contagion.

And as the mutant molecules that cause the contagion migrate eastwards, Italy sneezes and within hours develops a fever. Its situation is not as acute as Spain but it's unfortunately only a matter of time.

I am so grateful I didn't have to vote in the last Greek election, where the choice was death by a thousand cuts or a single stroke. When Greek citizens voted by a slim majority to take their chances in some form of bailout programme, I asked myself the question: how can they still believe in Europe?

Don't get me wrong, I do not believe for one minute that Europe or the Eurozone would deliberately harm the Greeks, but there are sins of omission as well as sins of commission. An incorrect diagnosis will lead to a fatal outcome, doctors differ, and an inability to confront and deal with the root problems - i.e. a common currency not fit for purpose - will lead to innocent victims and unintended consequences.

I have spoken of failings in the Greek system before, and indeed Greeks themselves acknowledge the need to deal with tax evasion, corruption and competitiveness. But it must be understood very clearly that Greece did not cause this crisis. Rather, it got tangled up, like the rest of us, in the impossible dream of a common currency without a banking or fiscal union. That sometimes seems to me to be the fatal flaw at the heart of Europe, this intention, this wanting to reach for the stars when the ground is unstable beneath your feet.

It's like the risk you take as you climb a ladder rung after rung, knowing there is no-one below you to hold it steady. It's a curious mixture of arrogance and hope, of impatience and the will to succeed, which has led to weak foundations and unstable architecture - a bit like some of the houses that were thrown up during the Celtic Tiger years in Ireland. They look good on the outside, but on closer inspection, the cracks are already beginning to show.

And just as Greece did not cause the crisis, it cannot cure it. The doctors are elsewhere - Berlin, Frankfurt, Helsinki and Paris. Their continued misdiagnosis threatens the health of their patient, and the flaws remain in the currency architecture. Fix that, and then we can move forward.

And speaking of Greece moving forward, as I write this, the Greek national team is preparing to play Germany in the European Championships tonight. Maybe, just maybe, an improbable Greek victory could lead to a little rebalancing.