November 16, 2010

As EU Presses Ireland, Greece Has '14 Days to Live'

Stocks tumble as Ireland denies need for bailout

As Ireland continued Tuesday to grab headlines over its financial crisis and world stocks dropped for a seventh straight day, broader worries shook the euro community as fears over an imminent Greek default took over.

Carl B. Weinberg, chief economist at High Frequency Economics, pointed out in a Tuesday commentary that Greece has 14 days to obtain clearance for the next tranche of its bridge financing loan from the International Monetary Fund (IMF)and theEuropean Financial Stability Facility (EFSF). If it fails to do so by Nov. 30, repercussions will be huge—not just for Greece but for the global financial system, said Weinberg.

The problem is that Greece must comply with the fiscal adjustment program imposed on it by the IMF: “six quantified targets that include a ceiling on public expenditures, a floor on tax revenues and a target for its cash balance for the quarter,” according to his report. Weinberg said Greece has already reported that its tax collections have fallen short and because of that, according to the agreement, it could be denied access to the 6.5 billion euros ($8.8 billion) it is otherwise scheduled to receive at the end of November. Without this money, “we predict that the government of Greecewill run out of cash within 60 days . . . Athens will have to . . . suspend payments of interest and principal on its national debt.”

That, according to Weinberg, “would be a catastrophe of historic proportions.”

Further complicating matters is the possibility that Austria may not commit to its next payment to Greece. According to Bloomberg, Josef Proell, Austria’s finance minister, said reports on Greece’s current financial situation do not indicate that it has fulfilled its responsibilities under the agreement; therefore, Austria may not release its contribution to the funds. A total of 750 billion euros has been set aside for the WFMF, with $440 billion coming from EU countries and $310 billion from the IMF.

If the program is restructured so that Greece can receive the needed funds, disaster could be averted, but Weinberg said, “we do not know whether Germany and other EU governments” would agree to changes.

According to another Bloomberg report, problems began when Angela Merkel, German chancellor, pushed for a permanent crisis resolution method that makes bondholders share in the expense of any future rescues. In the wake of an agreement by EU leaders to consider this, Irish bonds fell for 13 straight days and securities from Spain, Greece and Portugal also dropped. On Friday Merkel joined a five-country agreement that bonds currently on the market would be exempt from any such restructuring plan. The permanent system is to be devised by 2013.

Ireland’s fate, according to Weinberg, rests on “credibility. If the EU governments bite the bullet and fix Greece for good . . . then people will stop worrying whether Euroland has the wisdom and determination to fix Ireland too. . . .” If not, he said, Ireland will be forced into a more precarious position and the rest of the world will not be immune.

Ireland still insists it is not in need of a bailout. In an Associated Press report, Irish Prime Minister Brian Cowen reiterated that his government neither needs nor wants a Greek-style bailout. Cowen spoke to the Irish Parliament and said that officials had been meeting “with our European counterparts to see in what way market risks can be taken out of the equation.” He gave no details.

George Mokrzan, senior economist for Huntington Bank, pointed out in an interview with AdvisorOne that Irish banks “actually have been getting a lot of support from the European Central Bank (ECB). About a quarter of the supporting loans have gone to the little country of Ireland; that’s amazing in itself.”

From Ireland’s point of view, he said, there is adequate cash to make payments through the middle of 2011. “They were taken aback by this whole crisis, because they have positioned themselves to make payments till next year,” when they hoped that an economic recovery would help them move out of the crisis. “But the markets have been a bit impatient, and the ECB has a much wider responsibility so obviously this current crisis could be at least addressed by some capital infusions provided by the EFSF.”

That, he added, would not be popular in Ireland “because there will be strings attached, obviously.” Between austerity programs and an interest rate charged on those funds that “may not be to their liking right now [since] they are liquid till next summer, [t]hey may have some legitimate concerns.”

As long as the EU can internally manage the crisis, he said, he believes that would prevent it from mushrooming into a wider credit market crisis. It’s obvious, he explained, that Europe has committed a great deal of time and energy to the euro; it’s not something they’re going to throw away lightly.

John Lekas, CEO of Leader Capital, theorized that the EU might “intentionally let Ireland suffer in favor of a lower euro.” England and Germany, he added, would benefit from a lower euro and a higher dollar “because it allows them to get back in the export game without enacting policies that might upset the U.S. and others. Letting Ireland be Europe's sacrificial lamb will result in a flight to quality where we see a stronger U.S. dollar, U.S. Treasuries and lower equity markets. The euro will probably test its $1.20 low against the U.S. dollar from over the summer."

Read more about Ireland, its bonds and the Eurozone situation at AdvisorOne.com.

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