Looking more and more like the Lehman Brothers collapse, Greece found its anticipated rescue package fluttering in the wind. European Central Banks and private banks in the euro zone nervously weighed in on the need for a bailout. The European Central Bank and The European Union were unable to bring finance ministers in the region to an agreement.
Meanwhile, the Greek Parliament began consideration of drastic austerity cuts that brought opponents into the streets in frenzied protest. Numerous injuries were reported among civilian protestors and police forces.
Since the euro hit its June 7th peak against the dollar ($1.47), the currency fell to $1.4071 by midday Thursday but recovered to $1.4212 at the close. Since June 7th, the euro has decreased 2.5 percent and is trending lower.
The Greece dilemma is magnified because many of the region’s biggest banks hold much of the country’s debt. Moody’s has already warned three of France’s biggest financial institutions that a credit rating drop was possible because of the volume of Greek debt the banks hold. The United Kingdom banks also hold large quantities of Greek bonds. Even Germany, the zone’s largest economy, is endangered by the failure of resolution to this problem. In terms of exports, the lower euro works to Germany’s advantage.
Germany proposed that no action be taken until September on the Greek rescue plan. This would give Greece the time to implement its austerity cuts and prepare for the possibility of sales of certain assets in the country. Some of these assets amount to the privatization of public services. This is unpopular amongst the citizens.
At midday, Greek 2-year bonds were selling at 30 percent in light trading. The euro fell as low as 1.1946 Swiss francs before climbing back to 1.2058, down 0.3 percent for the session.
At one time, investors were fairly confident that a rescue package would take place immediately. Every time the finance ministers met to complete the details, the agreements fell apart. The bigger fear is that Ireland, Portugal and Spain are all seeking rescue packages and are closely watching how the ECB and EU deal with Greece. However, whereas debt restructuring was originally on the table, it does not appear to be the answer. All banks holding Greek debt would be impacted by a restructuring and could cause a tight credit squeeze throughout the region. Many of the region’s banks have too much exposure to avoid a credit rating decline.
The word from the EU seems to be that banks should begin to raise capital as an 11th hour rescue might well be the only solution for Greece.
IMF Leadership Questioned
Mexican Central Bank Governor, Agustin Carstens’ nomination to lead the IMF seems to have hit a standstill. Originally, Carstens looked to be the next IMF managing director but European resistance to leadership from an emerging economy has little appeal.
Instead, it appears that well known and battle tested French Finance Minister Christine Lagarde was in position to take over the leadership role of the IMF. With the euro zone in so much financial turmoil, Lagarde is favored by the European block.
Last week, she visited China and assured the Ministry of Finance that she believed that the country should play a larger role in IMF matters. As the world’s second largest economy, China is seeking to have more representation in global issues.
A decision on the managing director must be decided by June 30th. Between the United States and the European block, there are nearly enough votes to approve the candidate of their choosing.
