The *key* theme for financial markets in 2010 has been the Eurozone
crisis that started with the Greek government having trouble funding
itself after it was 'discovered' that the public debt figures had
been significantly understated. A budget deficit that was initially
estimated at 3.7% of GDP ended up being 'closer' to 15%. But it
wasn't just about dodgy data, the Greek banks were also 'in
trouble' and owed foreign lenders €300 billion.
By May, Greece had to admit defeat and turn to the European Union and
IMF for help and ended up receiving a €110 billion loan. Greece was
not the only country that had accumulated massive debts and deficits.
Portugal, Italy, Ireland and Spain had similar problems and the group
was quickly nick-named by the financial markets with the unflattering
acronym of PIIGs. However, as we learned from the global financial
crisis back in 2008, everything is connected to everything else and it
turned out that French, German and 'some' UK banks had the biggest
exposure to PIIGs debt and bank loans.
Eurozone finance ministers responded by setting up a €770 billion
rescue fund in an attempt to calm market fears and also put banks
through a series of 'stress tests' that turned out to be not that
stressful. This bought a few months respite during the summer but did
not resolve the underlying problem as the markets worried about the
prospect of sovereign debt default, the possibility of huge banking
losses and question marks over the viability of monetary union.
Ireland was next in the spotlight and in the end it received a €85
billion bailout, though controversially it was Irish taxpayers that
'footed' the bill, not foreign bank bond holders or property
developers.
The imposition of fiscal austerity has left the Irish economy
virtually bust. Other candidates for similar treatment are Portugal
and Spain and in the run-up to Christmas there were numerous credit
rating downgrades which rattled the markets. The end-game in all of
this is *unlikely* to be as orderly as EU policymakers would like it
to be. Germany does not want to write a blank cheque to bailout what
it regards as spendthrift peripheral economies and is resistant to
increasing the size of the EU rescue fund. However, EU policymakers
will ultimately have to come to terms with restructuring the debt of
countries like Greece and Ireland.
Banks will require massive recapitalization too and the total funding
requirement of banks and governments amounts to €1.7 trillion in
2011.This raises the question of the future of monetary union and some
argue that the crisis will force a federal fiscal union and by
implication an eventual European nation state. Others say a break-up
of monetary union is inevitable as new governments in countries like
Ireland or Greece decide that a 'diet of debt' *deflation* and
economic misery is not worth the candle and exiting monetary union is
the best of all available options. And in spite of Wagnerian
declamations from chancellor Angela Merkel, it is not inconceivable
that Germany might decide its future lies elsewhere outside monetary
union.
Take your pick. What does this mean for the UK? Well, at least we have
not been straight-jacketed by Eurozone economic policy and have had
the option of allowing GBP to devalue. However, our trade gap is
widening and not improving. Though we are outside monetary union,
European countries account for most of our exports. We actually export
more to Ireland than we do to high- growth China!!!! As we found out
with the Irish banking crisis, the government has 'coughed up'
around £7.0 billion given the exposure of UK banks to Ireland which
is roughly equivalent to the total cut in UK public spending for all
of 2010.
So escaping the clutches of monetary union is difficult.
Source: Fxstreet.com
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