Outlook - July 2011

World

Collateral damage

There are two main areas of concern for the markets at the moment – euro zone debt restructuring and the status of the US economy. While there is relief that the EU and IMF support package for Greece has (for the time being) avoided a chaotic bond default that would have had global ramifications, the tortuous process in arriving at a bailout agreement has inflicted collateral damage. The sharp schism between Germany and the ECB over how to treat bond restructuring illustrated a fundamental division in views. More importantly, the whole episode has laid bare the core problem – confronting a monetary union without a commensurate fiscal union and centralized treasury function. While the provision of liquidity has bought some time, the attachment of stringent austerity and privatization conditions to the bailout exacerbates the solvency squeeze confronting Greece. Consequently, the agenda has shifted from one of whether Greece will default