Positive reactions to Spanish bail out, but next Sunday Greece puts the Euro to test
The future of the Euro may be determined in the coming weeks, as Greek voters decide whether to honour the country’s international bailout and create a first test for Spain’s newly built 100 billion-Euro banking firewall.
With Greece going to the polls in six days, the last surveys of elector intentions showed the main party opposing the terms of its bailout vying for first place. The government in Athens has “a few weeks” before exhausting its funds, making this is “a make-or-break period,” former Greek Prime Minister George Papandreou told Bloomberg Television.
The European debt crisis, now in its third year, reached a new milestone after Spain abandoned unilateral attempts to rescue its banks and became the fourth country in the 17-member currency union to seek an emergency bailout.
The aid blueprint hammered out in an emergency conference call among Euro finance chiefs two days ago is designed to create a line of defence if the Greek voting unleashes a new bout of market turmoil.
“We are approaching a moment of truth for the Euro zone,” Britain’s Chancellor of the Exchequer George Osborne told the Sunday Telegraph. “After more than two years of uncertainty, instability and slow growth, decisions taken over the next few months could determine the economic future of the whole European continent for the next decade and beyond.”
Polls show the June 17 election in Greece may be a close race. New Democracy, Greece’s largest pro-bailout party, led anti-bailout Syriza by 22.7% to 22%, according to an ANT1 TV poll on June 1, the last date surveys were made public. An election on May 6 failed to produce a viable governing majority.
Syriza’s leader, Alexis Tsipras, has pledged to keep Greece in the Euro while scrapping bailout terms in order to end the hardship brought on by austerity. Meanwhile, pro-bailout proponents, such as New Democracy leader Antonis Samaras, have framed the contest as a decision on whether to leave the Euro area. A departure would trigger hyperinflation, a bank run and widespread poverty, Samaras has said.
Following the announcement the Euro made gains against the US dollar and the Japanese Yen. In early Asian trading on Monday the Euro bought 1.2647 dollars and 100.73 Yen, up from 1.2514 and 99.49 in New York on Friday. Likewise the Nikkei index at the Tokyo Stock Exchange rose 1.7% in early trading.
The currency bloc that at its setup in 1999 capped Europe’s progression from war to prosperity was declared irreversible by its founders. European Union treaties make no provision for a country to withdraw from the currency and the European Central Bank’s legal department said in December 2009 that an expulsion “would be so challenging, conceptually, legally and practically, that its likelihood is close to zero.”
As the Greek election result is declared, leaders of the Group of 20 most industrialized nations will be preparing for discussions on the threat of the debt crisis at a summit meeting in Los Cabos, Mexico. The June 18-19 gathering will be part of a series of meetings on the Euro crisis culminating in an EU meeting in Brussels at the end of the month, which could present a “master plan” drawn up by officials including EU President Herman Van Rompuy and ECB President Mario Draghi to hold the Euro together.
The Spanish bailout, which was announced June 9 after a three-hour conference call of European finance ministers, may offer a salve to markets ahead of the Greek vote.
Spanish government bonds posted their first weekly gain in a month and the country’s borrowing costs retreated last week amid optimism European leaders were preparing a bailout for Spanish banks.
Spanish Prime Minister Mariano Rajoy, who as recently as May 28 said he wouldn’t seek a bailout, characterized the weekend deal as a credit line for banks and an endorsement of his policies. Rajoy was forced to back off his pledge that the government would re-capitalize the banking system on its own after foreign investors scaled back their holdings of Spanish debt.
“If we hadn’t done what we’ve done in the past five months, the intervention of the Kingdom of Spain would have been on the table yesterday,” Rajoy told reporters in Madrid. He stuck to plans to visit the European soccer championship in Poland because the situation is “resolved.”
Spain is twice the size of the three economies that have sought bailout assistance so far, Greece, Ireland and Portugal. The funds will be channelled through the state-run FROB bank-rescue fund, and will add to Spain’s debt, which was 68.5% of GDP last year.