Friday night’s deal in Brussels was only made possible by sovereign downgrades and skyrocketing bond yields that still have the potential to push the periphery over the edge.
So what kind of a deal did we get? Well, to be honest, it does represent progress of a sort. Greece will see its cost of borrowing reduced and the bailout fund will have some extra money and opportunities to use it. The issue is that this programme will not be enough to solve the region’s problems and prevent the inevitable defaults that are coming for Greece, Ireland, Portugal and others.
Indeed, the fact that the new programme only helps Greece is symptomatic of the deep divides that still exist. Ireland and Portugal both need much more assistance if they are to keep their heads above water. Yet more and more austerity seems to remain the quid pro quo for this help being available. Both countries are insolvent at present and need a combination of lower rates and debt restructuring to chart a course back to growth. More cuts won’t help.
The fact that Lisbon may have announced it will implement another round of austerity is more politics than economics. Jose Socrates’ government seems to be putting political survival ahead of the country’s best interests. It knows that the government is finished if the EU and the IMF are called in. But if Socrates is hoping the fund will buy his country’s bonds in the primary market then he also knows that he will have accepted a programme of sovereignty sapping oversight.
Ireland also finds itself in a difficult position. Enda Kenny is right to resist calls to raise Ireland’s corporate tax rate in return for a reduced rate on the EU/IMF bailout package. He holds many more cards than the likes of Sarkozy gives him credit for. That’s because if Dublin takes the sensible course and forces senior bank bond holders to take a haircut then the ramifications will be huge for the whole of the European banking sector. So expect the line from Ireland to get tougher as we progress towards the end of the month.
In short, what we got in Brussels was progress but not the end game. The deal struck on Friday is far from the finished article and while the markets now may give the region a bit more breathing room there is still much to be done before the formal summit on 24-25 March.
Guy Johnson presents European Closing Bell on CNBC