Another big week for global markets and economies with Europe’s woes the overwhelming focus thanks to a vote in the German parliament and a decision on the continuing bailout of Greece.
The German vote is important, but a lack of progress on the 8 billion euros of aid for Greece or a ‘no’ would terrify markets.
The most logical decision is a ‘yes’ to the payment of aid to Greece (with assorted fingers crossed).
But while expectations are that Athens will receive the money, it hasn’t changed forecasts that the country will eventually default and that outcome is already priced into interest rates for Greek debt that are at facial levels (above 69% for two year bonds).
The question for financial markets is therefore what happens next.
The German parliament votes on the expansion of the European Financial Stability Facility (EFSF) on Thursday and that will come the same day as the third estimate of US second quarter economic growth.
The German vote will be the test and it’s why there are reports in European newspapers that the EU is planning a massive support plan, bigger than anything in the past.
It will be approved, but the question is whether all members of the government of Chancellor, Angela Merkel, approve it. There are suggestions of defectors or opponents in the governing coalition and Mrs Merkel’s own party, the CSU.
Under enormous pressure from the US, the IMF, Japan and other major economies, the EU is struggling to convince the world that it has the eurozone pressures under control, especially Greece. But no one is fooled by Europe’s assurances which all have heard before.
The European Financial Stability Facility is planned to be $US440 billion (but less in reality because of differing ratings for the supporting 17 members of the eurozone) and the reports speak of "a multi-trillion" euro plan. Just how and where the extra money would be found isn’t made clear.
It seems the Stability Facility would be used to provide support, especially for European banks that need recapitalising to stop the gathering run (especially banks in France).
The proposed Fund, which won’t be revealed until November, would be able to handle any default by Greece and the recapitalising of banks in that country and other countries such as France and Germany.
It would also be big enough to handle the bailouts of Ireland and Portugal and any assistance to Spain and Italy.
Thursday’s vote in Germany is therefore vital because Germany is the major economy (and a reluctant funder) of the Facility and of any future plan.
The proposal will allow the EFSF to inject capital into banks and buy the sovereign debt of countries not under a European Union and International Monetary Fund restructuring program (Italy and Spain for example).
But all 17 eurozone countries need to ratify it and this process has already been delayed further by a lost confidence vote in Slovenia.
Other countries could be voting on the proposal later in the week, but Germany’s decision is the most important.
Finland and the Netherlands loom as major tests for the Facility because both countries have noisy and anti-Europe right wing parties with a rising level of political influence: they are especially anti-Greek.
On Saturday Tim Geithner, the US Treasury secretary, and George Osborne, the UK chancellor of the exchequer, said that the eurozone needed to go beyond existing plans to prevent the Greek crisis spreading throughout Europe.
And the IMF’s comments that the major economies are working together were not reassuring because we’ve heard it before, and the situation has worsened.
Successive meetings of the G20 countries late last week, then the International Monetary Fund and then the World Bank all tried to sound united and engaged in trying to assure financial markets that they were on top of European sovereign debt issues and knew about the region’s fragile banks.
They issued statements, but no one believed them.
“Today we agreed to act decisively to tackle the dangers confronting the global economy,” the leaders said in their latest effort, a communique from the IMFC, the IMF’s governing body. They have been saying that for years, for each crisis.
The IMF also said over the weekend that it will decide by next April if its resources are big enough to help fight the spread of any global credit crisis.
"Global finance ministers questioned whether the IMF had sufficient capital to provide a safety net to troubled countries in the event the crisis widened from Greece, Ireland and Portugal into larger European states and beyond," Reuters reported.
"(IMF) financial resources may not be adequate to meet the potential needs of the crisis-hit countries," Chinese central bank chief Zhou Xiaochuan told the IMF’s steering committee," according to the newsagency.
It is unclear whether the latest attempt to calm markets will work.
They haven’t in the past and the problems in Europe have infected all markets in all economies across the globe.
America’s worries about Europe also sound hollow given their weak economy, political infighting and inability to do the right thing by the rest of the world.
