For the time being, the news from the euro zone seems to have stabilized the region. On Friday, the euro held ground as euro zone equities turned upwards. The European Central Bank’s commitment to pump 500 billion in three year notes into the region’s banks has temporarily stopped the bleeding.
Some of the biggest banking names on the continent received much needed cash infusions. The intent is to relax credit markets and stabilize the banking sector.
Deutsche Bank, BNP Paribas, Societe Generale and UniCredit are just a few of the big banks under pressure to avoid a downgrade from S&P. These behemoths of banking in the euro zone have other problems. While they will receive help with capitalization, these banks and many others hold too much regional debt.
As financiers untangle the crisis in Greece, the latest developments are discouraging. The very necessary structured debt settlement on Greek bonds is hovering between 50% and 75% redemption. While the euro zone and other global entities holding Greek notes will not be surprised by the 50% settlement, but a 70% settlement will increase the pain and raise doubts about the viability of the overall strategy.
Yet, with Italian yields in the 6-7% range and the debacle in Athens unwinding, euro zone equity markets staged a late week rally. This has been typical of the peaks and valleys in the euro zone. However, in the longer-term, much more capital will be needed. This 500 billion euro infusion can only be seen as a short-term fix.
Big challenges remain. Many of the euro zone’s most pressing issues sound familiar; unemployment, tight credit inflation, anemic growth. If the euro zone is to survive these challenges, it will require more capitalization.
S&P still has the region’s banks on credit watch. The ratings agency issued a statement that the 500 billion euro infusion does not remedy the lingering exposure to failing economies. As a whole, GDP growth in the region is stagnant. Most euro zone economies are experiencing negative growth.
While euro zone leaders say that Greece’s failure is unique, investors are taking a much more cautious look at Spain, Ireland, Italy and Portugal. Even the euro zone’s biggest economies, Germany and France are under pressure from the massive amount of regional debt.
Compiling the debt crisis with a lack of demand, layoffs have become commonplace. It is difficult to believe that the end game does not call for more debt restructuring. Spanish bonds are still yielding over 6%, and Germany topped 3 percent in a recent auction in which subscriptions left 40 percent of the offering on the table.
Even with a 70 percent write-off, it is difficult to see how Greece will survive. The citizenry feels the crush of massive austerity cuts. However, when the country tried to liquidate or sell certain assets, like government controlled utilities, there were no buyers.
Unemployment is high. Students cannot find work. Food prices are rising. The Greek economy is in crisis mode. Tourism is slowed. GDP has turned lower every quarter for the past two years.
How will Greece reverse the trend? This question plagues other countries. Many of these economies are unproductive. Europe’s export trade is sharply lower this year than last. While the falling euro should have provided a positive effect for the export marketplace, orders have not increased.
The ripple effect goes further, reaching the shores of the US. As Europe is America’s biggest importer, the US has more problems with the euro zone than our euro zone bond holdings. At a time when the US shows some signs of a recovery, we can hardly afford for Europe to slow any further.
But, as political ideologies have caused turmoil in Washington, the 17 members nations of the euro zone and 27 members of the European Union are far from harmonious. At least the US only needs three wings of government to coordinate. The politics of the EU and the euro zone make it nearly impossible to reach policy agreements.
The EU has applied for help to the IMF. However, the UK opposes the application to the IMF for more funding. The governing rules of the EU prevent applications for IMF intervention unless there is 100 percent in agreement between the EU members.
The ECB infusion is absolutely necessary. However, there are no quick remedies and the region’s inability to take a unified approach to withstand this second wave of Europe’s recession, the US will be impacted negatively.
