After more than two years of denials, waffling and half measures it’s crunch time for Europe. The fringe countries in the 17-member euro zone have beenunravelling at an alarming rate in recent weeks and the situationcould easily reach a truly genuine crisis on Sunday, when Greeceholds its second election since the inconclusive May 7 poll. If thesurging anti-bailout parties win, Greece’s exodus from the eurozone would go from possible to probable. More Related to this Story Euro zone Germans wary of financial burden they bear for rest of euro zone Brian Milner Unlikely euro bull expects compromise will save the day Ottawa Harper s refusal to help bail out Europe draws Germany s ire Europe s debt crisis took a turn for the worse on Saturday, asSpain asked its European neighbours for as much as 100-billion($129-billion) in loans to keep its banks from failing, becomingthe fourth country on the list of bailed-out euro countries as theregion grinds though a period of crushing debts, soaring borrowingcosts and economic stagnation.
Spanish Prime Minister Mariano Rajoy said despite the aid for thecountry s banks, economic conditions and the unemployment ratewill deteriorate further this year. As markets digest the newestbailout, they will also watch for the results of France sparliamentary elections Sunday for signs Socialist president,Fran ois Hollande has enough support to enact an agenda thatemphasizes government spending to spur growth over austerity. Mandated government spending cuts in exchange for emergencybailouts have been the preferred mode in Europe’s economic crisis,spurring widespread protests, and in Greece’s case, forcing twoelections. In Sunday’s Greek vote, a victory by parties opposed to thebailouts and austerity would force euro zone leaders to determinein the very short term just how far it is prepared to go to keepGreece in the euro, said Robert Wessel, managing partner inToronto with Hamilton Capital Partners. Until Greece’s May election, many investors, business chiefs,investors and politicians thought that Greece, were it to leave theeuro zone, would do so several years down the road, after allpossible options were exhausted.
But that was before 70 per cent of voters endorsed parties thatwant to shred the austerity programs, which they blame for plungingGreece into deep recession, or ditch the euro currency, or both. Ifthose parties form the next government and try to gut the austerityprograms, the programs’ sponsors the European Union, theInternational Monetary Fund and the European Central Bank couldvery well yank their financial support, almost certainly triggeringGreece’s quick and chaotic exodus from region. That’s because therescue loans were delivered in exchange for strict austerity andeconomic reform commitments. Depending on who wins, the Greek election on Sunday could hit theeuro zone like a nuclear bomb after a couple of months of relativepeace in the wake of Greece’s second bailout, in February. Smart Car Turbocharger
SinceGreece’s May election, the region has lurched from one crisis toanother, rattling the markets as the prospect of the euro’spotential demise gained momentum. The sovereign borrowing costs of Italy and Spain, the region’sthird and fourth largest economies, soared as investors dumpedthose countries’ bonds in favour of the safe bonds of Germany,Britain, the United States and Canada. Meanwhile, bank customers inGreece and Spain, fearing a collapse of their banks, withdrew everincreasing amounts of cash from their accounts and shifted it intoforeign banks. The rapidly spreading banking crisis came to head on Saturday, whenthe Spanish government confirmed the worst-kept secret on thecontinent that many of its banks, stuffed with dud real estateloans, were in dire need of emergency capital and sought as muchas 100-billion in financial assistance from European rescuefunds. On Sunday, Spain’s centre-right prime minister, Mariano Rajoy,declared the bank bailout a victory for the Spanish banking systemand for the euro itself. China New Product
The euro is an irreversible project, he said on television. Others weren’t so sure. Only a day before the official announcementof the Spanish banking bailout, Italian Prime Minister Mario Monti,speaking at a conference in Venice, said: There is permanent riskof contagion, contagion from Greece, from other countries. At thesame conference, Sergio Marchionne, the Italian-Canadian chiefexecutive officer of Fiat and Chrysler, said a break-up of thecurrency union is possible. Iveco Turbocharger
I think someone had better dosomething before we get to the point of no return, he said. The question is whether the Spanish bailout marked a turning pointfor Europe’s nearly three-year-old debt, growth and banking crisis,or was just another bandage effort that will ultimately fail tostop the hemorrhaging. Some economists and strategists think theslow-motion bank runs in southern Europe could turn into full-blownbank runs capable of instantly crushing economies. My extensive discussions and readings about the European bank runreveal, to my utter amazement, that there is a near total lack ofappreciation among market participants of the extent and gravity ofthis run, said strategist Marshall Auerback of Toronto’s PinetreeCapital. The bank bailout does not mean that Spain itself is cured.
Theeffects of the busted housing boom are still rippling through theeconomy, raising the jobless rate, destroying businesses anddamaging banks. Mr. Rajoy on Sunday said the unemployment rate now 24 per cent will continue to rise. This year is going tobe a bad one, he said. Economists fear that Spain, which is firmly back in recession, istoo big to save if continued economic and financial deteriorationwere to shut it out of the debt markets.
But Greece is the immediate worry. If the anti-bailout parties winthe Sunday election, form a coalition government and scrap theausterity programs, financial assistance probably would bewithdrawn. Then all bets about Greece’s membership in the euro zonewould be off. The problems are getting more serious and difficultto resolve, Mr. Wessel said.
As a result, the desire of theeuro zone to remain united is colliding with the weaker members’reluctance to enact necessary structural reforms. More Related to this Story Eric Reguly After Spain’s bailout, leaders fear for Italy’s future.