Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.
Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years.
So far those appear to not be happening.
Greece has had significant debt foregiveness. But so far no countries have been forced to leave the Euro. So far, Germany has made partial steps to bear a share of the burden of the European adjustment.
NY Times - The Germans are grumbling about it about it, but the European Central Bank (ECB) has had massive lending to Banks. The Germans are substantially on the hook for the ECB lending.
The ECB lent 529.5 billion euros ($705 billion) to 800 banks for three years, the second big infusion of cash in two months.
Banks could borrow as much money as they wanted at the benchmark interest rate, currently 1 percent, provided they posted collateral like bonds or marketable securities.
To make it easier for small community banks to participate, the central bank expanded its definition of collateral to include mortgages or other outstanding loans.
Germany signed off on the bailout of Greece.
Germany is trying to resist bigger bailouts and creation of superfunds. Germany has been grumbling all the way but so far have stepped up to bailouts and getting various concessions and control in return.
A recent review of the financial condition of the other countries in Europe suggests that only Portugal needs a Greek style bailout.
Who, then, should default? Let’s take a tour of the most likely candidates.
Portugal is the prime one. Estimates of interest rates and economic growth from the International Monetary Fund suggest that, in order to keep its debt burden stable, the government would need to run a primary budget surplus (excluding debt payments) of nearly 2 percent of gross domestic product -- a feat it has achieved in only three of the past 17 years. If it wrote down its debts by 40 percent, the required surplus would be a much more manageable 1 percent of GDP. Markets seem amply prepared for such an outcome: As of Friday, Portugal’s 10-year bonds were trading at a 47 percent discount to face value.
Ireland, too, could use some debt relief, though probably not the kind of writedowns that might impair its access to credit markets. Instead, the ECB should consider adjusting the terms of 30 billion euros in promissory notes Ireland’s central bank took on when it bailed out Anglo-Irish Bank -- an operation that was less crucial for Ireland’s banking system than for the bank’s euro-area creditors. The ECB is understandably reluctant to forgive the debt, which has saddled the government with an annual tab of 3 billion euros over the coming 15 years. But in the hope of boosting growth, it should extend the repayment period to reduce Ireland’s annual payments.
Spain’s immediate problem is its budget deficit, not its level of debt. So for now it does not need a Greek-style deal. And Italy? Thankfully, its obligations are just barely within its means, which is a good thing, for an Italian default would probably be more than the European banking system and the euro could bear.
Hence, the bloodletting doesn’t need to go much beyond Portugal. The government’s debts amount to only about half those of Greece, so a Portuguese restructuring doesn’t have to be too painful. The ECB, though, would need to prevent contagion from spreading to governments such as Spain and Italy. That would require a large enough guarantee to cover the medium-term borrowing needs of all euro-area countries likely to come under market attack -- at least 3 trillion euros, by our estimate. That’s far more than European nations have so far committed to any rescue fund.
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