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Row over collateral for emergency loans to Athens reveals cracks in the eurozone
For Greek politicians, the past month must have been a blessed relief, as the centre of Europe's sovereign debt crisis moved elsewhere. Italian trade unionists are gearing up for a general strike against austerity measures; Nicolas Sarkozy is slapping a supertax on the super-rich; and Spain is promising to make it unconstitutional to let the public finances get out of control.
But as September rolls around and the beaches clear, Greece is once again the focus of financial markets' fears.
In July, Athens secured a second bailout package worth €109bn (£96bn), which involved "haircuts" for holders of Greek debt, and contributions from its eurozone neighbours.
Both parts of that deal now look distinctly shaky. Finland, where the anti-European True Finns party scored well in recent elections, has demanded that Athens put up collateral against the Finnish share of the latest loan.
Other small but angry nations, including Austria, Slovenia and Slovakia, responded by saying that if Finland was getting collateral, they wanted some too. Eurozone finance ministers were discussing the issue this weekend; but the Finns appear reluctant to back down.
When questions emerged about what collateral Athens has left, given the €50bn privatisation plans it has already signed up to as a condition of the bailout, one Finnish minister reportedly said they would accept assets already earmarked for privatisation. Great swathes of Greek infrastructure are up for sale, from airports to casinos.
Setting aside collateral will reduce Greece's room for manoeuvre by tying up its assets; but, much more importantly, the row has laid bare the disarray in the eurozone.
"At every step, we're seeing the authorities pushed back further," says Neil Mellor, of BNY Mellon. "It's fire-fighting, pure and simple, and it's not obvious what happens next."
The resulting alarm among investors sent the yield on Greek bonds – the interest rate the government would have to pay to borrow in the open markets – back to record highs last week. It's as if the July rescue never happened – and it raises doubts about other elements of the emergency deal agreed at the time, including the new role of the European Financial Stability Facility (EFSF), which Sarkozy suggested was a fledgling European International Monetary Fund.
Changes to the EFSF need to be agreed by all member governments, and the squabble about collateral underlines the wide political divergences across the single currency zone.
The "voluntary" bond swap at the heart of the bailout also appeared to be in doubt this weekend, after Greece said it would pull out unless 90% of its creditors – mainly European banks – agreed to take part. Greek banks start reporting their results this week, and with government bonds making up much of their capital, they are expected to warn of losses of up to €5bn if the haircuts go ahead.
Greek banks have also suffered rapid declines in deposits in recent months, as consumers withdraw savings to spend, and wealthy Greeks squirrel away their assets in safe havens abroad.
This fresh outbreak of the jitters is happening against a sharp deterioration in the economic outlook right across the continent. Even in Germany, GDP growth has slowed to a crawl, and business confidence has plunged. The latest round of tax rises and spending cuts, with France, Spain and Italy all announcing new fiscal tightening since the beginning of August, are only likely to depress growth yet further.
In Greece, weaker growth could mean the fiscal sums no longer add up. Analysts are beginning to speculate that even after passing a highly contentious package of austerity measures in June, the government could miss its deficit reduction targets.
"There are signs that the Greek deficit is still not on track, despite the latest package that was agreed in July," said Julian Callow, of Barclays Capital. Athens' tax and spending plans are based on the assumption that the economy will contract by 4.5% this year. That is a catastrophic recession by any standard but it now looks too optimistic: Callow expects a contraction of 5.5%, perhaps even 6%.
Europe's sovereign debt crisis is far from over. It's not clear exactly what will spark the next outbreak of panic in financial markets but, with the banks due to report, the Finns digging their heels in, and the IMF flying in to assess Athens' compliance with its fiscal targets in the next few days, Greece looks like a pretty good bet.
As Callow says, "Greece is really the epicentre right now, and has a lot of capacity to be a very negative force for financial markets in Europe in the weeks ahead, if things don't go exactly according to plan."
Heather Stewart
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