Evercore Pan Asset

Markets have expressed a sigh of relief that the Euroland governments have once again ridden to Greece’s rescue. Last night the member states agreed to carry on financing Greece as private markets will no longer do so. They agreed to cut the interest rate on the loans, subsidising the credit more. They worked out the outlines of a package to lengthen the maturities of outstanding Greek debt, and agreed to longer periods for the lending they have made under the first Greek bailout package. For the time being Greece can pay salary bills for its army and civil service.
 
The politicians also agreed to make more flexible use of existing EU funds to see off trouble in other member states should markets query the credit worthiness of sovereigns or leading banks. They claimed that the Greek default on existing bonds would be a one off. It would not, we were solemnly told, take place anywhere else.
 
We do not think this is the end of the Euro crisis. The Greek loans do not solve the problem. It is true the interest bill has been cut, by the selective default and the lower interest rate. It is true that Greece can keep drawing down EU loans for longer to pay the bills. However, the Greek crisis will only be over when Greece has got control of her budgets, has curbed her appetite for borrowed money, and can return to private markets to borrow the smaller sums she will then need. This will be easier to achieve if Greece can return to economic growth. It would help if she could cut her public spending more decisively, or collect revenue more competently. We will be watching the underlying reality of the Greek budget numbers before declaring victory.
 
Nor does this package necessarily prevent the contagion spreading. The EU funds are by common agreement not large enough to finance Italy and Spain as well. It is important that these two countries keep or regain the full confidence of markets to be able to borrow at realistic rates without EU subsidy. This too depends on their growth rates and on their ability to exert budgetary discipline.
 
Part of the market relief comes from a further assertion of political will to complete the Euro project. We are told that France and Germany are working on new measures to increase EU control over taxing spending and borrowing by Euro member states. They will resume these debates in the autumn. Their problem is simple. An effective single currency needs a strong and competent economic government behind it. Meanwhile member states governments required to cut spending and raise taxes to conform are finding it difficult to carry electorates with them. It is easy to set out on a piece of paper the powers the EU needs to run a single currency. It is more difficult to persuade electorates that the Brussels centre now has to be in charge, enforcing lower levels of public spending.
 
We wish to stay out of EU sovereign bond risks, and watch the banks carefully. The more the stronger Euroland countries have to finance the weaker, the more their credit ratings will come under scrutiny.