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Post-Greek-election rally fails as markets say results don't solve the euro crisis
06/18/2012 1:26 pm EST
Why was the optimism so short lived?
Because the reaction to the news that Greece won’t be headed out of the euro immediately has been tempered by a realization that the election results don’t do anything to reverse the slide in the Greek economy. The shrinking size of the Greek economy means less tax revenue collected by the government and more resentment at the pain of the bailout deal from Greeks who don’t see any hope that the austerity strategy will clear the wreckage that is the Greek economy anytime soon. A shrinking Greek economy makes it extremely unlikely that Greece will be able to meet the deadlines in its bailout package.
Because German Chancellor Angela Merkel’s reaction to the Greek election has been, at least as far as the headlines are concerned, that Greece should not get anything in the way of lower interest rates or a extended deadline for meeting its budget targets. In other words, just another German NO and nothing in the way of actual proposals that might create bit more growth in Greece and the rest of the EuroZone.
An increase in the yield on Spanish ten-year government bonds to 7.2%, way, way into the danger zone and a record high for the euro era. Spain faces two bond auctions this week for short-term debt on Tuesday and for five-year debt on Thursday. There’s a legitimate fear that the auctions will see yields spike even higher after these auctions—and even a worry that the auctions might fail to sell the targeted amount of bonds.
News that for yet another week, the European Central Bank did not buy any Spanish or Italian debt in the financial markets last week. With Spanish yields above 7% and Italian yields above 6% the European Central Bank remains on the sidelines. The fear here is that this isn’t an attempt to put pressure on EuroZone political leaders to act, but a reflection of policy paralysis at the bank.
A realization that today’s meeting of the leaders of the world’s 20 biggest economies—the G20—in Mexico is not intended to produce any concrete proposals to address the euro crisis. That will have to wait for the European summit on June 28 and 29. (That summit will be preceded on June 22 by a meeting of the leaders of Germany, France, Spain, and Italy.) Today June 28 seems very far away.
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