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November 16, 2010 at 11:09 AM
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.
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.”