Thanks to it being able to raise 4.1 billion euro of three-month debt last week—at 4.43% versus 4.28% last month—Greece was able to repay the 3.2 billion ECB bond that expired yesterday. The immediate crisis staved off, Greece now awaits the next instalment of the EU-IMF bailout for which a series of meetings will take place this week, now that Europe’s tired leaders are back from a short vacation. The Luxembourg prime minister who heads a group of euro area ministers will kick things off with a meeting with the Greek prime minister who wants a two-year extension of the fiscal adjustment programme; later meetings are to be held between France’s François Hollande and Germany’s Angela Merkel, and then with the Greek prime minister.
While the pre-vacation summit meetings offered hope but left the details sufficiently fuzzy enough to cause the markets to panic, this time around it appeared Merkel was in favour of the ECB’s plan to buy bonds of troubled countries. Under the plan, first outlined by Reuters Breakingviews Editor Hugo Dixon, the ECB would try and manage borrowing costs in member states by giving them some form of an interest subvention. The view got cemented when Der Spiegel reported the next ECB meeting would set the yields for each country’s debt. While this saw the euro firm up, Merkel’s allies have been speaking of how the bailout cannot be a ‘bottomless pit’ and that ‘there are limits’ to the bailout for Greece. On Monday, however, Germany’s Bundesbank stepped up criticism of the ECB’s bond-buying programme and a spokesperson said there had been no discussion at all on targeting bond-yields. All of which sent the euro falling again.
That pretty much takes Europe back to where it was a few weeks ago, and we still haven’t passed the hurdle of the judges in the German constitutional court deciding, on September 12, on whether the setting up of the European Stability Mechanism is in consonance with the German constitution. The problem, however, is that Europe, and the US, are rapidly running out of time. While the US ‘fiscal cliff’ can see 2013 output growth halve to just 1%, it’ll take one Spanish downgrade to cause a huge panic since new holders will have to be found for large parts of its 730 billion euro debt. Italy is a bit better off at two notches above junk. An immediate trigger for downgrades could be the falling growth and hence higher debt levels—Q2 growth in Europe fell 0.4% yoy (0.2% qoq), by 6.2% in Greece, 2.5% in Italy and 1% in Spain. Ms Merkel’s end-game scenario continues to remain a mystery.