When finance ministers from the G20 major economies meet next weekend, they could be excused for having a sickening feeling of deja vu. This time it’s Paris, not London, but, just as in May 2009 when Gordon Brown brought the power-brokers of the world economy together in Docklands, they are trying to prevent a financial crisis spiralling out of control and dragging the global economy into recession. This time, though, there is far less political agreement or goodwill.
Instead of the US, where the collapse of Lehman Brothers sent consumers and investors into panic mode, this time the focus is firmly on the eurozone, and time is running out. Greece is on the brink of going bust if it doesn’t receive a fresh injection of cash, and bond vigilantes are focusing their fire on the much bigger Italian and Spanish economies, which had their debt downgraded by Moody’s on Friday. Meanwhile, many economists think the eurozone as a whole may already have sunk into recession.
An intertwined global financial system means that’s not just a problem for Europe. The Bric economies â€“ Brazil, Russia, India and China â€“ have warned that fixing the eurozone debt crisis must be an urgent priority, while the US has seen shares in its banks plummet because of their exposures to potentially toxic Greek debt. The G20 heads of state meet in Cannes on 3-4 November. By then the eurozone countries have to have a credible plan.
But for non-eurozone members of the G20, including China, the US and the UK, this week’s gathering is likely to be just as frustrating as their sojourn in Washington, when they repeatedly urged their eurozone counterparts to get a grip on the spiralling crisis, and were greeted with disdain or outright hostility.
For eurozone finance ministers, there are complex, interlocking challenges. First, they must decide whether, and for how long, to keep bankrolling the Greeks. Greece received its first bailout last spring, and a second rescue deal was agreed in July, against the background of panic on world markets. Without the much-delayed release of the latest â‚¬8bn (Â£6.8bn) tranche of that first loan, Greece could run out of money within weeks but, so far, despite a dizzying series of austerity programmes, Athens has failed to convince its creditors to hand over the cash.
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Meanwhile, parliaments across the 17-member zone have been hastily voting through the pact agreed in July, which involved increasing the powers of the eurozone bailout fund, the European financial stability facility (EFSF), enabling it to buy the debts of distressed economies when they come under pressure from investors, and to lend money to member countries that need to bail out their banking sectors.
But the July agreement could still fall: the Slovakian parliament, where there is widespread opposition to beefing up the EFSF, is due to vote this week. Even if the deal is signed by all member states, there is still intense pressure to come up with a much more powerful response to the crisis and show that eurozone countries are determined to contain it.
The EFSF is much too small to bail out Italy or Spain if that became necessary, or to fill the gaping hole in the balance sheets of Europe’s banks that would open up if the debts of Greece had to be written down by 50% or more, which many observers believe to be inevitable.
The International Monetary Fund (IMF), which has part-funded both Greek rescue loans, said last week that it would cost at least â‚¬100bn to shore up Europe’s banks. IMF head Christine Lagarde is meeting France’s Nicolas Sarkozy today to drive that message home. The travails of Franco-Belgian lender Dexia, which has called for help (for a second time) from both governments, because of its exposure to eurozone debt, underlined the urgency.
Markets were cheered when German chancellor Angela Merkel announced she was ready to countenance recapitalising the German banking sector. But insiders say France is pushing a competing plan, under which the EFSF would administer a Europe-wide bailout, perhaps along the lines of America’s “Tarp”, in which the government took mandatory stakes in all the major US banks to temper the stigma of going cap in hand to the authorities. If each country is left to rescue its own banks, France fears the fragile state of big lenders such as SociÃ©tÃ© GÃ©nÃ©rale could imperil its AAA credit rating.
Among the movers and shakers at the IMF’s annual meetings in Washington, there was talk of “leveraging up” the EFSF, to turn its â‚¬440bn-worth of firepower into something closer to â‚¬2tn. But financial experts say it’s hard to make the numbers add up. Unlike other multilateral lenders such as the World Bank, the EFSF does not have a guaranteed call on the resources of its sponsor governments, or “preferred creditor” status that would ensure it would get paid even if one of its backers went bust.
That means any bonds it issued to fund its activities would carry a risk of default, and could miss out on an AAA rating and potentially attract a hefty rate of interest. Yet it’s not clear whether giving the EFSF a direct call on the resources of Germany would be constitutional, let alone acceptable to the country’s taxpayers.
Until the question of the size and role of the EFSF is resolved, the European Central Bank is the only institution that can help. It reluctantly agreed to buy Italian and Spanish debt to bring their borrowing costs down to more manageable levels as bond markets attacked over the summer. But even that relatively modest intervention cost it the resignation of two German members, Axel Weber and JÃ¼rgen Stark, and its outgoing president, Jean-Claude Trichet, has been extremely protective of its independence.
Incoming ECB boss Mario Draghi, an Italian whose appointment was controversial in Germany, is unlikely to want to be seen to play a role in bailing out his crisis-hit homeland, making the politics of the situation even more difficult.
The past two years have seen a recurring pattern of bold announcements, followed within weeks, sometimes days, by a sense of vertigo when the political challenges re-emerge. But with every passing day, the markets’ expectations about the eurozone’s ability to fix the crisis rise by another notch, and the price of failure increases. Few in Brussels or Berlin are in any doubt that over the next fortnight the very future of the euro is at stake.