The Eurozone governments agreed to bail out Greece in July.
So why hasnt it happened yet?
Blame three phenomena: The darkening economic horizon,
threatening domestic political conditions in several Eurozone
countries and a determination to exert as much pressure as
possible on Athens to undertake the economic reforms they
believe are needed for it to maintain its membership of the
European single currency.
Even in July, when European leaders reached agreement in
principle to negotiate a second 109 billion Greek rescue,
the economic outlook, while deteriorating, had not become as
menacing as it is today.
The chief economist at the International Monetary Fund,
Olivier Blanchard, underscored the shift at a press briefing in
Washington today. He said that recently the global economy has
entered a dangerous new phase; the recovery has weakened
considerably and downside risks have increased
The IMF has significantly downgraded its economic forecasts
for both the Eurozone and the United States. Some senior
Eurozone policymakers worry that a recession is looming.
The recession which may be coming is complicating the
negotiations with Greece, according to a senior European
Union official actively participating in the discussions.
But for Eurozone officials, the deteriorating economic
outlook makes it even more important to pressure Greece to make
the politically difficult, growth-promoting, economic and
social reforms which it committed to but failed to implement
when it turned to the IMF for help in 2010. They fear that if
they relax the pressure on Greece, other Eurozone countries,
including Italy, (which is also drawing on Eurozone financial
support) will also back away from reform programs they have
promised in return for financial support. The European Central
Bank, the International Monetary Fund and the European
Commission (the Troika) are leading the bailout
negotiations with Greece, Ireland and Portugal. The ECB is
taking the lead in supporting Italy.
In the past few days there has been evidence that intense
political pressure has contributed to a change of heart in
Athens. At the weekend, George Papandreou, the Greek prime
minister, cancelled a planned visit to the annual meetings of
the World Bank and the International Monetary Fund in
Washington in order to remain in Athens to work on the more
rigorous reform package.
This followed a weekend meeting in Poland, the first ever to
be attended by an American Treasury secretary (Timothy
Geithner), where Eurozone finance ministers had told the Greek
finance minister Evangelos Venizelos, that his
governments economic reform proposals were too weak to
trigger release of the billions of euros of financial support
needed to prevent Greece defaulting on its debts.
Domestic politics in several Eurozone countries have also
been playing an important role in the negotiations to bail out
Greece. Unlike the first Greek rescue package agreed in May
2010, the second is being prepared with the full participation
of the European Financial Stability Facility, the
Eurozones official bailout vehicle which was created in
the wake of the May crisis.
Eurozone governments agreed on July 21 to give the EFSF
stronger powers and greater financial muscle. Although
parliaments in a few of the seventeen countries in the
Eurozone, including France, have voted to back the enhanced
powers of the EFSF, several have yet to follow suit, including
Finland, Holland and Austria.
Arguably the most critical vote to approve strengthening the
EFSF, in the German parliament, is not scheduled until
September 29. Germany is the Eurozones biggest economy
and so its support is vital to the financial viability of the
enlarged and strengthened EFSF. Some other Eurozone
countries parliaments will not vote on the EFSF until
early or mid-October. This protracted approval process also
helps to explain why Eurozone leaders have postponed a decision
on releasing more aid to Greece.
Although some suspect that Greeces Eurozone partners
are deliberating playing up the opposition within their
countries to the bailout in order to put extra pressure on the
Greek government, the fact remains that providing support for
Greece is deeply unpopular in several countries.
Particularly in Germany, where the coalition government has
been weakened by internal disputes over the Greek bailout,
governments do not want to take the risk of approving another
Greek rescue until they are more confident that they can tell
their electorates that Greece is indeed taking the tough
economic decisions being demanded of it.
They also want to be sure that private sector banks, which
have said that they will contribute to the bailout, will do so
in sufficient numbers to make a credible contribution to the
rescue. This is not yet certain. Were the banks to baulk at
participation, this would not only put pressure on euro area
governments to contribute more, it would also make the whole
Greek bail out process even more electorally unpopular.
The delay in finalizing the creation of the beefed up EFSF
is severely weakening the Eurozones capacity to contain
its sovereign debt crisis, its critics say. It is, they argue,
encouraging financial market speculation against other Eurozone
countries, including, crucially, Italy, the Eurozones
third largest economy, which is widely seen to be too big for
the Eurozone to save.
The United States, in particular, fears that the Eurozone
needs to be able to intervene more aggressively in Italys
sovereign bond markets in order to prevent the debt crisis
overwhelming the country, with potentially catastrophic
consequences for several big Eurozone banks (big holders of
Italian government bonds) and so for the world economy.
The Eurozone has acted to support Italy. On August 8, in a
deeply controversial move which divided its governing council
and may have triggered the subsequent resignation of Juergen
Stark, its German executive board member, the ECB began
purchasing Italian (and Spanish) government bonds to stabilise
its sovereign debt market.
But the United States sees the sums deployed by its
Securities Market Program, just over 140 billion so far,
as grossly inadequate to fight financial market speculation.
The IMF is worried too. (Eurozone) policymakers are
behind the markets, Blanchard said today.
Blanchard also repeated calls from the recently appointed
managing director of the IMF, the former French finance
minister Christine Lagarde, for Eurozone countries urgently to
strengthen the loss-absorbing capacity of weaker Eurozone banks
by demanding they increase their capital, if necessary through
the mandatory injection of public sector funds. Blanchard said
he was worried that banks might otherwise strengthen their
capital by a reducing their lending, so further weakening the
For the IMF and its new managing director, the Eurozone
crisis is turning into a test of its global influence. A
leading player in the drama, it is providing not only money to
support the bailouts of Greece, Ireland and Portugal; it is
also deploying its expertise in the design and monitoring of
the economic reform program and putting its own credibility on
Lagarde is under pressure to demonstrate to her colleagues
internally, and to emerging market economies who did not want
another European running the IMF, that while she, too, may be a
European she will take as hard a line with European countries
calling on the IMF for support as it did with Asian countries
in the regions debt crisis in 1997-8.
Her calls for a re-capitalization of weaker Eurozone banks
will also play well in Washington, where Obama administration
officials are deeply frustrated that European governments have
not acted more decisively, as they believe the United States
has, to strengthen the banking sector.