Nervousness about a possible default on Greek debt visibly rippled throughout Europe last week. Calm returned, at least temporarily, after a meeting of eurozone finance ministers Friday, attended by Treasury Secretary Timothy Geithner – the first time a U.S. Treasury Secretary has participated in this kind of a eurozone ministerial meeting. In an interview earlier this week Geithner said, “I think they [European leaders] recognize they’re going to have to do more to earn the confidence of the world.”
But Geithner’s attendance at the meeting underscored a new level of U.S. and global involvement with European attempts to protect the Euro. His participation came a day after the U.S. Federal Reserve led other central banks in coordinated action to flood the eurozone with dollars to prevent any liquidity crunch for French and other European banks with heavy exposure to debt in Greece and Italy. The goal of this bit of crisis management was to avoid any repetition of the freeze in credit availability in 2008 that occurred after the collapse of Lehman Bros. in the U.S.
At the eurozone meeting, it was decided to delay the decision on a fresh payment of $8 billion in bailout funds for Greece for a month until mid-October. The postponement is intended to allow Athens more time to meet its new austerity-budget commitments. Reflecting the seriousness of worries about a possible Greek default, French President Nicolas Sarkozy and Chancellor of Germany Angela Merkel held a video conference Wednesday evening with Greek Prime Minister George Papandreou. After the meeting, a Greek spokesman indicated that the three leaders agreed that Greece was an “integral” part of the eurozone and that additional austerity measures Athens announced recently will ensure the country achieves its fiscal targets.
The meeting signaled renewed determination by Berlin and Paris to act together as a renewed Franco-German core for the EU and now the eurozone. The day seems to be saved -- at least for the week -- by French-German reassurances -- plus all the hopeful talk of help from China and even the other BRICS.
And what a rollercoaster week that was. Shares of large French banks, PNB Paribas and Société Générale, dropped precipitously on Monday because of fears of their exposure to Greek debt. Italy’s borrowing costs hit a new high, reflecting decreasing confidence in that country’s finances. Italy raised euro 3.85 billion in five year bonds this week but the interest rose to 5.6 percent up from 4.93 percent – an all time high since Italy joined the Euro.
Italy is reportedly seeking investment from China’s largest sovereign wealth fund, CIC, raising new dimensions in the EU-China relationship. The word from Beijing was deliberately ambiguous, not promising Chinese intervention, but not excluding it either. “Premier Wen Jiabao made slightly encouraging noises this week, hinting that he would increase bond purchases and asking in return for greater market access to Europe. That’s classic Chinese diplomacy: cautious, incremental and narrowly focused on its interests,” wrote Fareed Zakaria in a Washington Post article this week.
In Greece itself, the financial situation got bleaker. Credit default swaps (CDS) on Greece have risen to record highs and two-year debt yields have reached 47 percent as markets anticipate a default on Greek bonds. The Greek parliament’s own watchdog said the debt dynamic is “out of control” with public debt predicted to reach 172 percent of GDP next year. New estimates of on Greek GDP indicated a likely decline of 5 percent next year.
Chancellor Merkel, who is central to the resolution of this crisis, publicly rejected suggestions that Greece would be forced into bankruptcy or to leave the euro zone. She called for German politicians, including her own finance minister, Wolfgang Schäuble, to stop making suggestions that Greece would be allowed to default. Schäuble said over the weekend that there will be no more money for Greece from Germany until Greece “actually does” what it agreed to do. “We offer no discounts,” he said.
Whatever outside assistance may be forthcoming for the Euro, Germany, given its prima pares economy in Europe, holds the key to restoring global confidence in the eurozone. As Financial Times respected analyst Martin Wolf wrote this week, “in the end, Germany must choose between a eurozone disturbingly different from the larger Germany it expected, or no eurozone at all. I recognize how much its leaders and people must hate having been forced into a position in which they have to make this choice. But it is the one they confront.”