Tuesday is a big day for European markets, in case you hadn’t noticed.
And not just because eurozone finance ministers are meeting in Brussels this afternoon to talk all-things-Irish. Elsewhere in the currency union — both Spain and Greece had bond auctions earlier this morning. And the latter has also just experienced a little bailout slip-up.
From AFP, as summarised by Bloomberg:
Nov. 16 (Bloomberg) — Greece has not met the commitments it made to the European Union in return for its agreed bailout package, so Austria has not yet released its contribution to the package, Agence France-Presse reported, citing Austrian Finance Minister Josef Proell.
This is the €60bn Greek bailout package agreed in the spring. The country is due to receive the next tranche of its bridge finance loan from the International Monetary Fund and fellow eurozone members at the end of this month — but it’s predicated on Greece actually showing that it’s following through on its fiscal austerity promises.
Austria, it seems — is not buying.
And neither, for what it’s worth, are the guys over at Charles Stanley:
[Greece] has agreed, with the IMF, six quantifiable targets including a ceiling on public sector expenditure, a floor on tax revenues and a target for its cash balance for the quarter. Greece has already reported that while public sector expenditure is under control it has fallen short on tax collections of the minimum requested by the IMF / EU. Applying the IMF terms strictly, this should mean that Greece does not receive the €6.5bn distribution of funds scheduled for the end of the month. If these funds are not receive it is possible to speculate that the Greek government could run out of cash within 60 days. If that happens then the Greek government would have to shut down part or all of its operations and suspend interest and principle payments on its debt.
It is impossible to overstate the extent of such a catastrophe for the financial markets. It is hard to predict what might happen to a still fragile global financial system were c.€300bn CDS to be triggered on the same day. It seems likely that the ripple would spread swiftly throughout the banking and even non-financial sectors and few parts of the world would emerge unscathed.
Can this disaster be avoided? The most obvious way would be for the IMF simply to indicate that Greece is still on the right track, but that the pre-agreed fiscal targets were too stretching. In such circumstances Greece would likely get a new adjustment programme and adjusted targets and the crisis would be averted…until next February. It is doubtful whether Germany would agree to such a proposal, given that any back sliding on the original terms would likely play out poorly with a German population already deeply uncomfortable about bailing out the region’s periphery.
Alternatively, the existing programme could be redefined in the light of new initial conditions. Eurostat yesterday revised its estimate of Greece 2009 fiscal deficit to 15.4% of GDP from the previously estimated 13.6%. Is Greece thus obliged to bring the new figure down to 7.6% of GDP, as agreed with the IMF / EU in May, or is it still obliged to bring the figure down by 6% of GDP? Could this be sufficient to recast the entire programme? It remains to be seen how willing Germany and other EU members would be to countenance such an adjustment.
Indeed.
And did we mention that European divisiveness is also (still) rearing its head in the other eurozone wrangling currently taking place — about that Ireland bailout?
Finland, apparently, is not a fan.
Related links:
Austria blocks monthly Greece aid - Austrian Independent
Greeksville, USA – FT Alphaville
Moody’s looks to Finland – to explain Ireland, Spain - FT Alphaville