ANALYSIS:Whisper it, but there is the glimmer of optimism coming out of Brussels that the euro crisis may have turned a corner, writes ARTHUR BEESLEY, European Correspondent
GATHERED IN Brussels for two days of talks on the debt crisis, European finance ministers are trying to find their way on to the road to rectitude. Many knotty problems remain to be unravelled, but the mood right now is a little less downbeat than only a few weeks ago.
Gloom was everywhere when autumn turned to winter as even the most unflappable officials confessed to a sense of anxiety and despair. Almost imperceptibly, however, that sentiment seems to be lifting a little. While no one suggests the magic solution is finally to hand, the sense that the situation is not worsening daily marks an improvement of sorts.
On the upside there is growing confidence in Italy’s unelected premier Mario Monti, hope in the continuation of reforms in Spain, and relief at the absence of “carnage” when Standard Poor’s downgraded France, Austria and a clutch of other euro zone sovereigns.
Whether all of that proves to be a temporary salve or something more lasting remains to be seen. In the present malaise, it is as well to point out that the optimists have been proved wrong at almost every pass.
Furthermore, concern still surrounds the slow-motion response to the crisis in Germany and the potential for unhelpful fireworks as French President Nicolas Sarkozy seeks re-election this spring.
With Ireland still in the troika’s good books, attention centres now on Dublin’s campaign to lower the cost of the €63 billion bank rescue.
Even though Minister for Finance Michael Noonan says progress is being made, there is some concern at a European level that too public a clamour for relief might signal distress where none is justified. Either way, Noonan says the initiative is one for the medium term.
On the wider panorama, the EU authorities continue to grapple with three fiendishly complex dossiers: the new Greek bailout; the fiscal treaty; and the strengthening of the bailout “firewall” and associated measures.
Each is riddled with risk and uncertainty – political and financial – and each comes with numerous imponderables attached. If Europe is to overcome the crisis, however, it will have to make rapid progress on every one of these fronts.
As ever, the greatest dangers surround Greece. The ministers had anticipated that talks on private sector involvement in its second EU-IMF rescue would be much further advanced by now. They hit stalemate at the weekend as the Institute of International Finance banking lobby warned that it could not make any better offer.
While the fine grain of the discussions centres on the interest rate to be paid on new Greek debt exchanged for old bonds, the net point is this: Europe fears the terms now on the table will not bring Greece’s debt to 120 per cent of GDP by 2020 from 160 per cent as required by the IMF. That would be quite a deduction, but a 120 per cent debt ratio would still be twice the EU limit.
The assumed loss for private Greek bondholders here is about €100 billion, or a 50 per cent “haircut” on their receivables, but much more may be required. Thanks to the country’s worsening public finances and shrinking economy, the fear now is that debt goes only to 125 per cent of GDP or 127 per cent even after a 50 per cent cut.
The banks insist they won’t go further, raising the prospect of a catastrophic default if the talks fail. But Greece’s sponsors continue to press hard.
Although there’s no end of warnings from public- and private-sector officials about the fragility of the present situation, the sense remains these talks were always going to go to the wire. As pressure intensifies for a deal within days, the effective deadline has moved out to an EU summit next Monday.
If the patterns of the recent past are anything to go by, EU leaders will leave this one to the very last minute. The same goes for the debate on the new treaty, an unloved creature, and the contentious debate over the firewall. Berlin continues to play for time but the IMF’s unambiguous demand for an increase points to tension behind the scenes.
The saga continues.