British europhobes love to portray the European Union as an evil bureaucracy, intent on creating a voracious super-state. There is no denying the club has expanded in recent years. The total membership is now 27 countries and, of these, 16 have adopted the euro, thereby relinquishing their monetary policy independence.
But the actions of the eurozone members this week suggest that true economic union, never mind political union, is some way off. On Monday, finance ministers from the eurozone announced that they had “clarified the technical modalities enabling a decision on coordinated action and which could be activated swiftly in the case of need”. They were referring to a possible bailout of Greece, though the language used was typically impenetrable. This show of unity was intended to tell the capital markets that Greece was not to be abandoned by its fellow members, and the eurozone could handle its own problems.
Perhaps this would have had the desired effect if the ministers had also announced firm plans to provide financial assistance, not just talk about it. But they stopped short of a concrete commitment, and the credit markets were underwhelmed. Greece’s spreads hovered just below the 300bp level, where they had been range-bound since the beginning of the month.
The united front began to crack under the pressure. A possible intervention by the IMF, considered beyond the pale only last week, was now being mooted by Germany and other members. France stood firm, and insisted that a European problem should have a European solution. The discord among the core eurozone members troubled the markets, and brought back an issue that had faded into the background. Greece’s spreads were trading as wide as 340bp today.
Spreads have widened in the latter part of this week, with the Markit iTraxx SovX Western Europe index hitting 80bp today, the first time it has reached this level since March 1. The index is now trading wider than the Markit iTraxx Europe index, a situation reminiscent of the Greece-induced panic in February. That’s not to say the corporate market has been unaffected by this week’s debacle. The main index closed at 78.75bp today, over 5bp wider than Wednesday’s close.
But the issue hasn’t had the seismic impact on the markets that we saw in February. Most think that a default is highly unlikely, and Greece will receive some level of support from the EU, IMF or a combination of both. In the first week of trading post-roll, we should see the picture becoming clearer. There is an EU summit beginning next Thursday, and the Greek government has demanded that a bailout package be put on the table. If the EU/IMF delivers, then Greece could return to the backburner. For how long will depend on its success in fulfilling its austerity promises.
Markit’s Gavan Nolan wrote this CDS report