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Monday 11 December 2017

Eurozone soap opera approaches its final episode

THINGS cannot go on like this. Ever since Ireland's banks essentially went bust in September 2008, the eurozone has been lurching drunkenly from one crisis to the next.

Just when it seemed as if one phase of the crisis was drawing to a close, the next stage comes around.

Now the markets, utterly exasperated by the apparent unwillingness and inability of Europe's leaders to get their collective act together, have essentially shouted "enough".

By pushing Spain, the eurozone's fourth-largest economy, to the brink of bankruptcy, they have made it clear that they are no longer willing to endure this seemingly never-ending financial soap opera.

Even by eurozone standards, the speed with which last weekend's deal to recapitalise the Spanish banks unravelled was truly remarkable.

In the early days of the crisis, such as the first Greek bailout in May 2010, such patch-up jobs could be relied on to calm the markets for a couple of months.

Not any longer. The markets had seen through the Spanish deal by Monday afternoon.

Crisis

Now a combination of the rapidly worsening Spanish banking crisis and this weekend's Greek general election has brought matters to a head.

While the €100bn "rescue" for Spain's banks that was agreed last weekend might seem like a lot of money, it won't be enough to fix that country's broken banks. It won't come even close.

Look at what happened in this country. The Irish taxpayer has already pumped €63bn into our banks. The Spanish economy is eight times the size of Ireland's.

A Spanish bank bailout proportionately the same size as that of Ireland could end up costing more than half a trillion euro.

A bailout of such proportions would, by subordinating existing bondholders, i.e. pushing them to the back of the queue of creditors, see the value of existing Spanish bonds slashed: Greek bondholders took a 75pc "haircut" when that country restructured its debts earlier this year.

Not surprisingly, Spanish bondholders aren't waiting for this to happen to them and are selling their holdings as fast as they can.

Austerity

Meanwhile, regardless of Sunday's result, it is now clear that the consensus behind further austerity has broken down in Greece.

Will the new Greek government, no matter who wins, be able to force its citizens to accept further austerity? Almost certainly not.

Despite opinion polls showing that, notwithstanding their opposition to further austerity, most Greek citizens want to remain in the eurozone, that country is almost certainly on its way out of the single currency, possibly next week.

That's when the merde will hit the fan. While German sources insist that the contagion from a 'Grexit' can be contained, I'm not so sure.

This is because, if Greece leaves, the nature of the euro fundamentally changes from being a true currency union to no more than a glorified fixed exchange rate system.

Misery

If Greece can leave the euro, then why not other countries such as Spain, Portugal or even Ireland?

What, if anything can be done to save the euro? Given all the misery it has inflicted on the periphery, is it even worth saving? Would it not be better to admit that the euro was a well intentioned mistake and give it up as a bad job before it causes even more mayhem?

The leaders of the world's 20 largest economies - the G20 - meet this weekend. The eurozone crisis, which threatens a global great depression, will be top of the agenda. This will be followed two weeks later by the regular six-monthly summit of European leaders.

Unless a credible solution can be found by then, which is unlikely given European leaders' previous record of dithering, the euro won't survive beyond the end of the month in its current form.

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