Like Esperanto, Greek bail-out is a bit of a fudge
By Patrick Jenkins
It’s probably very unfair to the estimated 2m people who speak it. But Esperanto – the artificially constructed language that celebrates its own name-day on Tuesday – has always struck me as daft.
The ideals behind it were all very noble – a Russian Jew, who grew up in such an ethnically and linguistically fractured neighbourhood that he longed for a common language to bind everyone together, clearly had the best of intentions when he came up with it 130-odd years ago.
But the concept of a language created rather than evolved, spoken only by enthusiasts, and one which ironically – in our increasingly globalised world – is surely doomed to failure, given the dominance of English, has always reminded me of the euro.
Late last Thursday, German chancellor Angela Merkel, French president Nicolas Sarkozy, and other European luminaries, including European Central Bank president Jean-Claude Trichet, were all smiles, determined to demonstrate that the product of 30-odd years worth of work by their political forebears was not unravelling like a bad Esperanto translation. After weeks of standoff, they had reached agreement on a €109bn aid package to Greece – heartening proof, if you are a europhile, that the eurozone nations are totally committed to each other; depressing proof, if you are not, that there is seemingly no limit to the stream of cash that can be poured down the drain.
The smiles lasted a good while – through Thursday night and well into Friday – as the financial markets responded well to the new deal. There was the expected package of government aid, there was the hard-fought involvement of big bondholders – largely banks and insurance companies – and there was the vital concession from the ECB that the “selective default” that the credit rating agencies would be bound to declare would not prompt the central bank to declare null and void vast swaths of Greek debt posted with central bank as collateral against liquid funds. Greece was saved.
But it was almost as if the fragile veneer of pan-European co-operation, and the faith the markets took in it, could only last while everyone was together, smiling, in Brussels. By the time the key politicians and deal negotiators had flown out of the Belgian capital by late morning on Friday, traders had turned bearish on the deal.
It was always clear they would. There were two specific issues that this deal had to address – and on both counts it was too timid.
First, it had to stem the panic that investors have increasingly shown about the economic fragility of the peripheral eurozone countries. Second, in order to do that with sufficient financial muscle and to ensure governments would not remain on the hook for ever, it had to secure significant involvement of private sector bondholders that own the sovereign debt, not just of Greece, but also of the other peripheral nations that have sought international bail-outs – Portugal and Ireland.
By midday on Friday, the markets had realised that this complex deal was a bit of a European fudge.
The politicians had largely restricted the exercise to Greece, despite alarming signs in recent weeks that investors were beginning to shun much more of the eurozone – from Italian sovereign debt to French banks.
One of the big achievements of the deal was the way it signed up the private sector and imposed a “haircut” on the value of their Greek sovereign debt. The package was a lot tougher on bondholders than the banks’ own initial proposal a month ago. But it was still faint-hearted, involving only a 21 per cent haircut, when the market had been braced for twice that.
Even though, on the estimates of the European Banking Authority, the umbrella body that regulates the sector, the banks of the region are now capitalised with €100bn more than they were a year ago, there is still not enough money in the system to allow banks to take the losses that should be imposed on them and for governments to break the vicious circle that has connected them to the banks since the financial crisis began.
It was obvious three years ago when banks had to turn to state coffers for bail-outs that governments themselves could in turn find themselves overstretched by debt.
Yet no one is taking this crisis seriously enough. Petty rivalries within the EU, point-scoring politicians with looming elections to win at home, and self-interested banks loath to write off too much debt too quickly have distracted everyone from sorting out this mess properly. To change that the eurozone must be given a serious system of governance with its European financial stability facility financial assistance programme made big enough to lead a credible bail-out of any nation in need. At the same time it must ensure banks bear more pain and bank shareholders stump up more capital. Only then can the governments, banks and economies of the eurozone really start to recover.
Patrick Jenkins is the FT’s banking editor