The war of words between the European Central Bank (ECB) and European governments has moved up a notch in the last week, as the deadline of the EU Summit on 23 June looms large. Even seasoned professionals can have problems when trying to decipher what different comments or scenarios will mean in this game of brinkmanship. For treasury departments, this uncertainty – and the possibility of a sudden trend in either direction – means extra focus needs to be maintained around that deadline. In order to try and simplify the rhetoric, it is important to have an understanding of the main points.
Greece’s first bailout was on a two-year basis and a year has now passed. Its two-year debt is now at a mind-boggling 26%.
It is clear that the austerity measures have not been sufficient, and without either a rescheduling of the debt or an injection of fresh funds – or both – Greece will default. This would have implications in terms of the Greek debt the ECB has been buying, as well as the loans both European governments and the International Monetary Fund (IMF) have already issued (€110bn). Some say it would be a European version of Lehman Brothers.
The ECB does not want the debt to be rescheduled to a longer date in the future, as it says that is in effect a default. The ECB does not want to roll over the debt it has already bought when it matures. The bank has no problem with creditors buying further Greek debt to replace what is coming to maturity.
However, the German government wants any further loans to have conditions attached, so that private creditors are liable for losses. It has said that the euro can cope with a Greek default.
While all this is going on, Greek domestic investors are voting with their feet, as they perceive default to be almost inevitable. Deposit accounts for two-year maturity and savings deposits are down 8% and 16% over the past year. This has been overlooked by many, but is potentially extremely serious.
The problem of having a fixed exchange rate that is too high for Greece means that a devaluation (as has occurred with sterling) is impossible. This means competiveness can only be restored by wage deflation and/or further austerity. This is likely to increase deposit withdrawals and add to the risk of rates moving even higher, notwithstanding the obvious increase in political risk.
So where does this leave treasury departments? Normally, some sort of compromise is achieved, and so talk of the euro breaking up seems highly unlikely. However, many will argue that as each new crisis matures, it is simply a postponement of the inevitable. What is clear is that the euro will continue to be buffeted by events in the coming months and, as long as no permanent solution can be found, it will be a reason for periods of euro weakness.
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