Talk is cheap. And not terribly effective, even when it’s coming out of the mouths of Europe’s financial leaders, in ending a financial crisis like the one that continues to engulf Europe this morning (February 8).
The current phase of the crisis started in Greece, when the Greek government finally admitted that its budget figures were a fiction and the budget deficit would be a huge 12.7% of GDP. Traders and investors have sold Greek bonds and stocks ever since.
As of noon today in London the prices of Greek bonds were down again with the yield on the two-year Greek government bond rising to 6.61%. (For comparison, the yield on the two-year German government bond is just below 1% and the yield on the two-year U.S. Treasury note is 0.77 %.)
Greek stocks haven’t fared any better. National Bank of Greece and EFG Eurobank Ergasias, the country’s two biggest banks, were down 4% this morning.
Over the weekend, European financial officials talked tough about the crisis. “The European members of the G-7 will make sure it is managed,” French Finance Minister Christine Lagarde said on Saturday, February 6, after a meeting of Group of 7 financial ministers and central bankers in Canada. The European Central Bank is “confident” that Greece will cut its deficit to the 3% European Union limit by 2012, said European Central Bank President Jean-Claude Trichet.
Even U.S. Treasury Secretary Timothy Geithner weighed in. “I just want to underscore they made it clear to us, they the European authorities, that they will manage this with great care,” he told reporters.
Trouble is that everyone knows that there’s not much backing up the rhetoric.
The rules of the European monetary union are very clear on the standards that members are supposed to meet—a budget deficit of no more than 3% of GDP, for example—but the agreement doesn’t lay out any credible enforcement mechanism. What happens, investors and traders want to know if Greece can’t or won’t live up to its promises of fiscal austerity?
That’s a live question because there’s a good chance that the Greek government won’t be able to deliver. Polls show that most Greeks oppose the government’s plans to increase the retirement age and raise fuel taxes to reduce the budget gap. Teachers, hospital workers, and tax collectors, all facing possible job and wage cuts, have called a 24-hour strike for February 10. Workers in the private sector plan to follow about two weeks later.
And if the government caves in to political pressure and doesn’t deliver?
The measures open to European Union financial officials are extremely limited. There aren’t any sanctions that can be imposed to force Greek politicians into fiscal responsibility. Union rules prohibit bailing out a member.
That leaves the option of an end run around the system with a bailout financed by, say, Germany and France, being laundered through the International Monetary Fund, or leaving the solution up to the bond market and hoping that the private financial markets can force Greek politicians into taking measures that most Greeks oppose.
The problem with either of those alternatives is that Spain, Portugal, Italy, and maybe Belgium (according to the panic du jour) stand on the edge of their own fiscal crises. Bailout Greece and why not a much bigger Spain? Abandon Greece to the mercies of the bond market and prepare for carnage in Portugal’s debt markets.
There’s no easy solution and the crisis, rather than abating, still looks to be spreading to other countries in Europe. So far, in my opinion, the problems are large enough to rattle global financial markets but not contagious enough to pose a real threat to the system.