Rob's 16th guest post on Saving the Euro.
The Euro zone debacle stumbles ever onwards
Is there a white knight waiting over the horizon to rescue the damsel in distress that is the Euro zone?
I very much hope so as the longer this drags on, the worse the situation will become.
The Eurocrats, and so called Finance Ministers, do not fully understand how the "market" works – it is made up of thousands upon thousands of individual traders who have the same failings that we all do. Year end is coming and either boredom or frustration will start to develop – they all hate uncertainty, and all they need to see is a chink in the armour in the underbelly of that bloated behemoth that comprises the 17 member states of the Euro zone.
They have been probing and looking for weaknesses over the last couple of months, and in turn have put pressure on the Southern European nations driving funding costs in Italy for example (3rd largest European economy) up towards 8%.
Governments were toppled, funding costs across the board have risen without a sensible plan to resolve the issue being agreed.
All you ever here is what "Germany" wants which amazes me. There are 17 members in the Euro zone – take out the PIIGS as they have nothing to contribute because they are effectively bankrupt, possibly also France as it is basically strapped for cash, and you still have 10 other member states and they have been totally silent – I think that is bizarre.
Last week Germany got a taste of what it was like to be a PIIG as a relatively routine debt auction turned into a complete disaster – they were unable to realise as much funding as they wanted, and the price they had to pay rose significantly, actually pushing the cost of funding above that of the UK for the first time in a number of years.
Germany is paranoid about letting the ECB act as a real Central Bank – lender of last resort, and unleashing it to support Euro zone debt issues – and have concentrated upon bolstering the EFSF, but the general view is that the EFSF alone will not be sufficient to stem the rot – they are desperately calling upon cash rich sovereign funds elsewhere to bolster the funds available.
Germany will also fight tooth and claw against anything that might raise the "I" word in Germany – INFLATION.
Up pops the IMF – is this the white knight?
The next tranche of the bail out to Greece has now been approved, and the IMF is due to pay about 1/3 of that, but will they be willing to pay more in the future – the Euro zone Finance Ministers certainly hope so?
The IMF has a "war chest" of around $390bn to play with, but this is to cover global issues, not just the problem in Europe.
Both the USA and the UK have stated that they will be willing to bolster the funding of the IMF, providing it is not all immediately channelled in to Europe.
I suppose the question to ask is will the combined cash available at the IMF, ECB and EFSF (EFSF funds will be leveraged under a new plan to cover about 30% on any initial losses on Government bonds) actually be enough to set Europe back on its feet?
My honest answer is that I don't know – the longer the problem stays unresolved, and the longer they have to pay inflated funding costs, then the harder it will be to come up with a viable rescue package.
I am still amazed however, that the currency market has not hammered the Euro beyond recognition – it is currently trading around Euro/$ 1.33, but 18 months ago it was down below Euro/$ 1.20.
By comparison, GBP/$ is around 1.55, and it has happily traded in a range of about 1.55 to 1.65 for about the last 18 months – so no real back lash there either.
Europe is really in limbo-land at the moment.
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The author, Rob (not his real name), works in one of UK's largest charities.
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