Sometimes when Australian journalists travelling with the PM overseas try to score a few domestic political points, they stumble badly writing on subjects remote from their usual round. And so it is with Dennis Shanahan of The Australian, taken out of his cosy natural environment of the press gallery where the narratives are simple and the agenda explicit, and asked to demonstrate a grasp of big-power summitry and international economics.
This morning Shanahan continued his discredited attempts to beat up Julia Gillard over the bad-tempered reaction to criticisms of Europe from European Commission head Jose Barroso. “Julia Gillard’s forthright advice for European leaders to fix the EU’s crisis by taking lessons from Australia has landed her in an economic row at the G20 summit, which is being overtaken by the financial implications of the Greek elections.”
Greece? Maybe Shanahan hasn’t kept up-to-date while he’s been jet-setting but Greece is no longer the big worry — it’s Spain and its shattered banking system. That is what we have seen in the past 24 hours as the Europeans confirmed the accuracy of the advice from Gillard, as well as Canadian PM Stephen Harper, who are just two of the critics lining up to have a swipe at the Europeans. There is real concern about the Europeans’ “crisis, what crisis?” attitude and the way the eurozone is slowly drawing the rest of the world into an economic mire through uncertainty.
This is the point missed by Shanahan and lazy journalists at the ABC and other outlets who parroted his claims, and it’s a critical one. They forget the unique capacity of Europe for self-harm as they stumble from leak to briefing to communique, whether it’s after a summit, finance minister’s meeting, the G20 or just an ordinary day of tension over Greece, Ireland, Spain, Italy or France. The Europeans have turned confusion of message into an artform and the past 24 hours we have seen more of the same.
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For the past 12 hours or so there have been a confusion of leaks about Spain. Investment bank Nomura says the Spanish solvency risks, and not Greece, are now the primary focus for the eurozone. The Financial Times and other media reported that a full audit of the Spanish banks has been delayed from July to September, fuelling fears that the banks may need more assistance than originally thought. Spain’s central bank has apparently agreed the delay with the government, the IMF and the ECB and the auditing firms.
The delay is intended to provide the auditors more time to complete their evaluations of the banks’ books and also responds to the fact that many Spanish companies and government institutions are only thinly staffed in August. That latter point confirms that Spain, like Greece, is a long way from fully understanding how close the country is to the edge of a very big cliff. The first phase of the report is still expected this week, hopefully tomorrow night, our time. The expectation is that the audit will prove that Spanish banks will only need up to the €100 billion of aid already announced. The worry is that it will be more, perhaps another €40-50 billion more of funding may be needed.
That news came just after Spain sold €2.4 billion of 12-month bonds at a yield of 5.074%, up from 2.985%. It also sold €640 million of 18 month notes at a yield of 5.107% against 3.302% in a previous auction of these securities. Dealers said that while there was strong demand for the bonds, no country can sustainably pay such high rates of interest amounts when the official rate across the eurozone is 1% (and less in the US). By way of contrast, Denmark has sold two-year note at a negative yield for the first time. Tomorrow, Spain will offer €1-2 billion of three bonds, maturing in 2014, 2015 and 2017 which will add further pressure, unless there’s a circuit breaker in the meantime.
The second and final day of the G20 summit saw a prize example of confusion. Around noon at the summit, reports surfaced in British media that Germany was going to end its opposition to the eurozone’s bailout funds buying the sovereign debt of troubled European nations. The reports appeared in The Guardian, Sky News and other media websites — clearly they were briefed by a UK government official.
This is a potentially major development. The stories, without attribution, said the money would come from the €500 billion European Stability Mechanism and the €250 billion European Financial Stability Facility, but that no announcement would come in Mexico. The ESM rescue fund has yet to be ratified by European governments, including Germany.
But soon after the reports appeared, a German government official said there was no discussion of the proposal. The euro promptly fell in foreign exchange markets.
Later in the day Reuters reported that the EU was working on a formula to limit the impact on Spain’s public deficit of the bank rescue by issuing very long loans at very low rates. That will dominate a meeting of eurozone finance ministers in Luxembourg on Thursday night.
And an early version of final communique from the G20 meeting was leaked to the media and suggested that eurozone members of G20 will commit to driving down borrowing costs across the single currency area. The Financial Times reported “according to officials briefed on the discussions, Mario Monti, Italy’s prime minister, raised the possibility of using the eurozone’s €440 billion rescue fund to buy peripheral bonds on the open market. But Angela Merkel, Germany’s chancellor, was non-committal about the idea during a formal session on Monday night.
“However, officials said Ms Merkel had subsequent conversations on the sidelines of the summit which led her interlocutors to believe “she may be willing to do more”, said one European official. The official cautioned, however, that Merkel was not yet ready to commit to any definite course of action.
And on Greece, there was also two conflicting messages: the first was that the European Commission said there will be no new agreement with Greece on the terms of its rescue package, but the commission said it did want to work with a new Greek government to push through reforms and revive the economy. The second message was that Greece’s €174 billion bailout program has slipped behind schedule, thanks to the political indecision in the past 4-6 weeks. That means more talks with the new Greek government, when it materialises.
According to one report, “while the targets and deadlines of the bailout plan are likely to be maintained amid continued resistance in Berlin and other northern eurozone capitals to easing the rescue’s terms, the EU official said that Athens would have to find new ways to hit those targets.”
So is that clear? No new agreement with Greece, but talks will be needed with the new government (who by the way want changes in the agreement, but not repudiation).
It’s exactly this sort of confusion and uncertainty that is keeping markets in a volatile state, prey to every rumour and whisper and keeping consumers on edge about the future. If Julia Gillard and her G20 colleagues aren’t lecturing the Europeans, they damn well ought to be. And if the Europeans don’t like it, too bad. The stakes are extraordinarily high here.