Given that the IMF has shaved off nearly three-fourths of its 2013 projections for Europe (from a GDP growth projection of 0.7% in July to 0.2% last week), it’s just as well that Europe’s leaders meeting in yet another crisis summit have come up with what they claim is an agreement on creating a single banking supervisor responsible for overseeing eurozone banks from sometime next year. The decision paves the way for the eurozone’s rescue fund to inject capital directly into ailing banks. But it’s important to keep perspective considering eurozone leaders have flattered to deceive on more than one occasion. Indeed, while a French government official told Reuters the funds could flow into ailing banks as early as the first quarter of 2013, a German source said it was unlikely to happen soon. Chancellor Merkel’s plan for a common EU budget also appears to be going nowhere, and there isn’t clarity on whether Greece will get more time and whether Spain will finally apply for a bailout and under what conditions—tens of thousands of Greek protesters rioting on the streets suggests the appetite for taking large austerity measures is limited, ditto for Spain where unemployment is currently the highest in Europe, at 24.3%.
Since October 19, 2009, when the Greek finance minister told the world Greece’s deficit was three times larger than that thought earlier, we’ve had a series of bailouts with not much impact. Greece got its first 5.5 bn euros in May 2010, another 2.5 bn in September … it’s got a total of 148.6 bn so far, but the fate of the balance 100 bn committed is uncertain. Ireland has got 54.9 bn euros so far of the promised 85 bn funding and Portugal 61.4 bn of the 78 bn committed. None of this has helped in the sense bond yields in the troubled periphery continued to rise—in the case of Greece, to a whopping 45% above the rates for 10-year Bunds in March, 13% in the case of Portugal and about 3% for Spain. After the ECB commitment last month to do whatever it takes to save the euro, spreads fell to around 15% above German Bunds for Greece a few days ago and to around 4.3% for Spain.
More than the debt of the periphery countries is the banking stress, and that’s why operationalising the banking rescue fund is critical. While Spain’s GDP is 1,064 bn euros and its total government debt 840 bn, it’s bank debt is as much as 2,220 bn. So here’s the potential problem: apart from the issue of when the regulator will start to function, and how many banks it will have jurisdiction over, no agreement has been reached on whether the funds would be made available to countries, like Spain, that have taken on fresh debt to bail out their banks—Germany wants the funds to be available only for new bank bailouts. In short, eurozone leaders aren’t moving with anywhere near the speed they need to.