European illness contained?

It now seems slightly less likely that a Greek credit event will cause a domino effect across Europe this year, but if the event occurs it will still have to be absorbed. Many believe that the bond payment that needs to be on 20^th March is the date that the start of an orderly default will commence. Talks with the private sector have avoided a disorderly default, and ‘apparently’ a deal is nearly achieved, although negotiations for the next troika package have been a struggle. Greek opposition parties and unions are arguing the idea of more cuts – although I think the morons don’t have much choice but to accept. The idea is that this will contain the infection that is Greece.

As much as the EU has tried to contain the infection, some symptoms of illness have been seen in Portugal and Hungary. The Hungarians have managed to make their European partners queasy by threatening the independence of their central bank. This in turn put the IMF loan package in jeopardy, which without Hungary would become a new source of contagion for central Europe. Portuguese interest rates have continued to rise even as other peripheries saw yields ease. Speculation is doing the rounds that the nation could need another 30bn bailout on top of the 78bn it received from the IMF,ECB, and troika last year. This has led to denials from officials that they won’t, but as history has proven that these denials tend to have an opposite effect, hinting that Portugal may soon need to enter bailout negotiations. The idea that Portugal may surrender to the same sickness that sent Greece to the A&E is worrying as Europe is almost expecting Greece to be on life support, no such preparations have been made for Portugal, which brings the next 999 call....French banks.

The doctors are currently trying to put an emergency medical kit together to contain such an infection. The new EU treaty is set to be signed by most of the union’s members, UK and Czech Republic decided against it and others such as Sweden may still get cold feet. This breakthrough treaty is a crucial moment for the Euro zone, as more central power gives Germany the political motivation to continue with the Euro experimentation. This could in turn lead to actual fiscal union and euro bonds. Officials have also confirmed that the ESM backstop fund will begin in July 2012, but discussions are still uncertain about boosting its capacity beyond 500bn.

Guru’s view: amputate!