Festering Debt Crisis Pressures Euro Downwards
After a week when it appeared that the euro was entering into calmer waters, the tension and weakness returned.
The yield on Portuguese bonds has risen to 7.6% -- an all-time high in the euro era. The Portuguese financial experts have themselves estimated that Portugal will not be able to repay her debt that at this rate and this could necessitate another bailout. Rather than pay the high yields, the Portuguese government decided to perform a reverse bond auction and bought up its own bonds rather than offering them for sale. It is doubtful that this tactic can be employed more than once. The European Central Bank has also intervened and bought up some of Portugal's debt.
The fear is that if Portugal is seen to be failing, attention will then turn to the much larger economies of Spain and Italy. One can only go so many times to the German financial well for relief. German Chancellor Angela Merkel faces resistance from her Free Democratic partners in the coalition and additionally she must keep a wary eye on state elections that could alter the composition in Germany's upper house, the Bundesrat, to the detriment of her coalition (Merkel's Christian Democrats already lost a state election after agreeing to a EU bailout).
Appropriately at a meeting of Finance ministers from the 17 countries in the euro bloc that began today in Brussels and will last through Tuesday, German Finance Minister Wolfgang Schaueble doubted that there would be progress on a more ambitious debt package..
Another pressure point is that the "done deals" of the Greek and Irish bailouts are threatening to become unglued, either because the Greeks and Irish are negotiating for improved terms over the original agreement, or that differences surfaced over Greek and Irish compliance with the terms.
In the latter case, a potentially damaging dispute was papered over during the weekend. On Friday EU and IMF inspectors, while approving the next loans to Greece, let it be known that Greece had to sell off $68 billion in state assets and accelerate reforms to help economic revival.
The Greek government replied that these comments were unacceptable and an intrusion into Greek domestic affairs. Greek Prime Minister George Papandreou called IMF heads Dominique Strauss Kahn (who is more and more looking as though she wishes to be the Socialist candidate in France's 2012 presidential elections) to complain about these comments.
Greek officials claimed that they have honored all the pledges to letter. Temporarily the IMF and EU beat a retreat and praised Greece for her steadfastness.
Today Enda Kenny, leader of Ireland's Fine Gael Party (the almost certain winner of the Irish elections scheduled for the end of the month, making Kenny the next prime minister) met with Chancellor Merkel. He informed her that Ireland was united in resisting calls to raise its 12.5% corporation tax to continental European levels.
A corporate tax raise was considered the quid pro quo that the Irish could have offered for better repayment terms. The Irish, however, consider the lower corporation tax one of the few remaining levers that they possess to revive the economy and encourage outside investments in infrastructure that would raise Irish productivity.
The Irish are complaining that the taxpayers, rather than the investors, are footing the bill for insolvent Irish banks. They are therefore threatening that as a last resort they will not return the full amount to debt holders in Irish banks. This is a very risky strategy because it obviously would undermine investor confidence in Ireland, but the Irish are banking on EU fears that the fallout from such a move will stimulate investor panic that will engulf the entire euro zone. Therefore, the EU, despite brave words to the effect that the deal was not subject to renegotiation, may in the end, cave in.