Thursday, February 7, 2013

The European Central Bank to analyse who all are next in the felicitation parade

Though EU & IMF have agreed on an audacious $956 billion bailout plan for the Euro zone to control the sovereign debt crisis that started with Greece, it won’t be of much help. B&E talks to experts across continents, including the European Central Bank to analyse who all are next in the felicitation parade by Manish K Pandey

Then again, Spain isn’t far behind too (Nobel laureate Paul Krugman in fact has mentioned, “The biggest trouble spot isn’t Greece, it’s Spain.”). With the unemployment rate hovering over 20% and the budget deficit at 11.2%, the possibility of Spain being the next epicentre can’t be ignored. And if that happens, it would be really difficult for policymakers to handle the chaos in the euro zone as Spain’s economy (which is fourth-largest in the Euro zone) accounts for about 12% of Euro-zone GDP. While rating agency S&P has already downgraded Spain’s debt to AA from AA+, even the yields on Spanish 10-year bonds are touching their highest level (4.27%) since 1999.

Though both the nations have decided to cut upon their spending to bring down spiralling budget deficits (while Spain plans to cut its budget deficit to 9.3% of GDP this year from 11.2% in 2009, Portugal plans to slash it to 7.3% of GDP, from 9.4% in 2009), it will take them years before that actually happens.

Eszter Miltényi from the European Central Bank draws a bleak picture to B&E while also commenting, “The latest information shows that the correction of the large fiscal imbalances will, in general, require a stepping-up of current efforts. Fiscal consolidation will need to exceed substantially the annual structural adjustment of 0.5% of GDP set as a minimum requirement by the Stability and Growth Pact. The longer the fiscal correction is postponed, the higher is the risk of reputation and confidence losses.” The Spanish Central Bank apologised to B&E for “not being more helpful” while refusing to answer “political subjects.”

While a communiqué sent to B&E by the US Department of the Treasury (which says that the determined & consistent implementation of the financial programme by Greece, combined with this exceptional assistance from the member states of the Euro-Zone and IMF will help restore financial stability in Greece and promote market confidence) shows that there is that political will to the solve the problem, numbers demonstrate that the task is really tough in reality.

“$765 billion is what would be needed to prevent defaults in all of three (including Italy) of Europe’s weaker southern tier economies,” says a report from IHS Global Insight. No doubt, EU & IMF have agreed on an audacious $956 billion bailout plan for the Euro zone to hold back the escalating sovereign debt crisis that started with Greece, but then one should not forget that both EU and IMF have had a hard time mobilising even the $57.34 billion promised to Greece, leave alone the $956 billion promised package. And evidently, what is in reality required is almost twice that figure (close to $2 trillion) for the European Union to survive this new wave of post-recessionary economic collapse.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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