EuroFinance Miami: European sovereign debt crisis far from over
Treasurers and banks expect Greece will default and the future of the eurozone in its current form remains in doubt.I'm in Miami at EuroFinance's annual treasury and cash management conference and you would think that talk at the opening day of the conference would be of the growth and prosperity in the LatAm region or high growth markets like China and what it means for corporate treasurers and companies doing business in these regions.
Well next door running in parallel to the main North American conference was another stream on high growth markets (that is the BRICS as opposed to the PIGS) where no doubt the talk was all positive, but in the main conference the ongoing sovereign debt crisis in Europe loomed large, so much so that 57% of banks and corporates attending agreed that Greece is likely to default.
They were no doubt persuaded by the convincing case made by 'dour' Scotsman and RBS head economist, Stephen Boyle, who pointed out the difficult situation the PIGS. Its appears the problems in the PIGS (Portugal, Ireland, Greece and Spain - perhaps soon to be joined by Italy and Belgium) are not helped by the fact that the ECB (European Central Bank), which sets monetary policy for the eurozone, has no control over the fiscal policies of the eurozone countries, and the eurozone countries in trouble are unable to massage interest rates which are fixed as a result of monetary union. The only way the PIGs can get out of the situation they have found themselves in is substantial fiscal austerity says Boyle.
When you look at the CDS spreads of countries like Greece and Ireland the situation is even more starker, Boyle points out. He flashed figures showing that Greece was paying interest in the region of 25% on its debt (there is no way that the Greek economy is going to grow by 25% this year or any year for that matter) and Ireland, somewhere in the region of 12%. "The cost of insuring debt in these countries means people believe they are likely to default," says Boyle.
Not only that, what about the European banks that have lent to European sovereigns that now find themselves in trouble. How exposed are they? "The interconnectedness of sovereigns and banks is like a ball of wool that could start to unravel," said Boyle. "It's difficult to see where it could end." When you take all of this into consideration it becomes abundantly clear that the sovereign debt issue in Europe has not fully played out yet and could still impact the wider "real" economy.
When asked by an audience member whether the eurozone is likely to break up, Boyle cut to the chase: "The euro will continue to exist but perhaps in a different constellation. People underestimated the political importance of the [euro] project. There will still be monetary union with fiscal union but not all the people that are in it [the euroZone] today will be in it tomorrow."