Published on The Malta Independent¸ issue 29 May 2011
While revellers are driving around the streets honking their horns in delight at the result of the divorce referendum¸ I thought I would choose a more serious for my comments and have chosen to write on the travails of the euro.
This issue has again hit the headlines but it has drawn little if any comment from our local journalists¸ as the focus has been the divorce issue. Really and truly¸ one can console oneself that there is very little a tiny EU member can do to affect the course of the financial troubles hitting the euro at this particular juncture¸ so why worry when such a life-threatening subject such as the introduction of divorce was in the balance at yesterday’s referendum. However¸ it is very much in our interests to follow the financial news and consider the consequences to our open economy if the euro continues in its unhappy trajectory¸ starting with the latest plunge of the euro against the dollar which has fallen 0.7 per cent to $1.4216. Oil’s decline mirrored this fall¸ with the price of crude going down by more than $2 a barrel .Again¸ while this is welcome news for an island that imports and relies 100 per cent on fossil fuel for its electricity generation there has¸ strangely¸ been no announcement of fuel cuts by Enemalta.
Yes¸ it is a welcome sign that the volatility of the currency is resulting in a correction in oil prices¸ but uncertainty is not healthy. Notice how the euro fell after the German Bundesbank issued a statement that led the market to anticipate that the European Central Bank will increase interest rates to calm inflation. The euro is in the sick bay and reflects the actions of the profligate sons and daughters of ancient Sparta¸ who are the cause of the higher maturing yields on their bonds. The Greeks are no longer wearing luxuriant foliage or garlands in their hair but instead have been protesting in the streets against sustained austerity measures.
The rate credit rating agency Fitch has¸ in turn¸ cut Greece’s long-term debt rating to B+¸ four notches below investment grade. Greece has to pay through the nose to repay the €300 billion in accumulated national debt. A cool 16.6 per cent on 10-year Greek bonds is no walk in the Pantheon with a refreshing drink of ouzo. What happens in Greece is being carefully monitored by the other two patients in the sick bay – Portugal and Ireland. Evil tongues – mostly from British eurosceptics – are saying that Spain will be following Portugal¸ Ireland and Greece in needing financial rescue as the eurozone’s debt crisis spreads. Spain’s socialist government has just paid a heavy price at the polls¸ while the beleaguered Greek prime minister is gracefully nurturing the presence of international debt inspectors taking a sceptical look at it books. Can it meet the terms of its €110 billion bailout package? If it hits a bug¸ then the medicine will be bitter¸ with more austerity ordered from Germany and the International Monetary Fund.
It is a crucial point in this judgment which decides if the next €12 billion tranche of rescue loans is approved. This is precariously poised to happen next month. If the Greeks fail to pass the test¸ will a second bailout be inevitable? The answer lies mostly in the hands of the German chancellor. She controls the purse strings of what is by far t