|European Central Bank President Mario Draghi arrives for a meeting of the eurogroup at the EU Council building in Brussels on Tuesday, Nov. 29, 2011. Eurozone finance ministers meet Tuesday to discuss the current financial crisis. (AP Photo/Virginia Mayo)|
Debt crisis players want others to act first
FRANKFURT, Germany—The major players with the power to tackle Europe's financial crisis are in a standoff -- to a large degree, of their own design.
Each has the capacity to take strong action independently, but instead is urging one of the others to make the first move. That's complicating expectations for a major summit of European Union leaders next week.
The European Central Bank, Germany, heavily indebted eurozone governments and the International Monetary Fund each wants, needs or expects something from someone else before taking politically difficult and risky steps to quell the crisis.
The you-first attitude -- at least partly a bargaining tactic -- is prolonging a two-year stalemate that has weighed down the continent's economy and global financial markets.
The standoff got another strong expression Thursday when Mario Draghi, the head of the European Central Bank appeared to dangle more help in front of hard-pressed European leaders -- if they first come up with an agreement on tough rules to bar overspending by individual eurozone governments.
Draghi's timing wasn't accidental. Rules on government spending are on the agenda for the Dec. 9 summit in Brussels.
The hope is that a promise of future action would be enough to calm markets. It's unclear if a promise alone would prompt the ECB get more aggressive.
"We might be asked whether a new fiscal compact would be enough to stabilize markets and how a credible longer-term vision can be helpful in the short term," Draghi said Thursday before the European Parliament. "Our answer is that it is definitely the most important element to start restoring credibility."
"Other elements might follow, but the sequencing matters," he said.
Many economists believe or at least hope the "other elements" might include stepping up the ECB's so-far limited purchases of government bonds. It is the step that many politicians and governments have been urging on the ECB. They say it's the only thing that will reassure bond market investors that governments will be able to pay their debts, so they remain willing to lend to them at affordable rates.
Here are the reasons the major players in the European financial crisis have for acting -- or not -- as they do:
-- Eurozone governments: Many economists have called for the European Central Bank to give them financial and political breathing room by stepping up its purchases of government bonds. That would drive down their borrowing costs and, for the most heavily indebted nations, take the threat of default off the table, while policymakers work on a longer-term solution.
The 17 eurozone nations have set up a bailout fund, the European Financial Stability Facility. But, fearing voter backlash, they balked at giving it more than euro440 billion ($590 billion) in financing -- not enough to backstop Italy, whose borrowing needs next year alone would be some euro300 billion.
Finance ministers from Italy and Belgium have called for the issuance of eurobonds, or government debt that is jointly backed by all eurozone members. But Germany, a major influence as the eurozone's biggest economy, has resisted because -- unlike everyone else -- this would cause its borrowing costs to rise. So Germany wants something else first: a so-called fiscal union that put all members on the same page when it comes to keeping spending within limits.
"The German opposition to the Eurobond is by no means permanent -- it is just that a sequence of steps needs to be followed first before they can be introduced," says analyst Marchel Alexandrovich at Jeffries International Ltd.
-- The European Central Bank: It says governments need to be the ones to convince bond markets they are good enough credit risks to be allowed to borrow at affordable rates.
Draghi signed a sharply worded letter to the Italian government in August along with Trichet, spelling out steps Italy needed to take to improve growth. Those steps included shaking up rules on hiring and firing people and letting firms break away from industrywide wage deals.
Draghi's refusal to immediately expand the ECB's bond purchases, expressed again Thursday, is based on concern about what economists call "moral hazard": the risk that bailing someone out will just remove any pressure to reform risky behavior. Germany, where opposition to bailouts runs deep, has backed him on that point.
Jennifer McKeown at Capital Economics in London thinks the bank will have to eventually break down and buy large amounts of bonds. So far, it has committed euro203.5 billion and holds only about 6.5 percent of the outstanding debts of Italy, Spain, Portugal, Greece and Ireland.
"We suspect that it will refuse to do (more) until the eurozone governments have agreed on much clearer rules to prevent governments from running up such high debts in future," McKeown said. "That could take quite some time."
Simon Tilford, chief economist at the Centre for European Reform in London, said that Draghi's "no" might just mean "no."
"I don't think the ECB will undergo some complete transformation in response to this," he said. "It might be a bit more but it won't be shock and awe stuff."
-- The International Monetary Fund. It has helped with a third of the money for the bailouts of Greece, Ireland and Portugal.
But it needs something else before it could even think about playing the lead role in backstopping much larger Italy or Spain: more money.
Economist Madhur Jha at HSBC Bank Plc says the international crisis lender has about euro290 billion ($389 billion) available -- not enough to be the bulk of any bailout of a country Italy's size.
It can raise money through loans from other countries, however. But some IMF members, such as Russia or China, would likely want enhanced political power at the institution in return for their money.
Several economists have proposed that the IMF borrow from the ECB, arguing that would skirt the legal prohibition on the central bank lending to governments. But it could be viewed as violating the spirit the EU treaties. It would certainly face opposition on the same grounds as eurobonds and bond buys, that it rewards bad behavior.