Euro saga will drag on and on

Greece is heading for its third bail-out, but nobody in Germany wants to talk about it.

It has been an unusually quiet summer in Europe. The economic data have improved of late, and investors have been waiting for the results of federal elections in Germany on 22 September. But neither of these factors will solve the crisis. As Jeremy Warner notes in The Sunday Telegraph, "new fault lines keep appearing".

One is Slovenia, where, as in Spain and Cyprus, bankrupt banks threaten to bankrupt the government. Slovenia can't grow its way out of the problem as GDP is falling rapidly, says Capital Economics. Recapitalising the banks will cost several times the planned 2.5% of GDP. So it now looks as though Europe will lend Slovenia the money to bail out the banks.

That wouldn't do much for confidence in the eurozone, but "a potentially far more serious problem" is waiting in the wings, adds Warner: "the need for a third Greek bail-out". Greece's debt load has shot up to 160% of GDP as the economy has plunged into depression. To ensure Greece's debt load is returned to sustainable levels, creditors will have to take a haircut.

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The last Greek debt restructuring' was confined to private creditors. This one will hit the pockets of European institutions, who now own most of the outstanding debt. This is where politics complicates matters. A debt restructuring would mean that taxpayers' money had been written off; at present, governments can say they are only providing temporary loans with conditions attached.

In Germany, an effective permanent transfer of money to Greece implied by debt restructuring would be very unpopular. Indeed, a Greek debt restructuring has not been discussed in the election campaign.

With the opposition Social Democrats also opposed to permanent transfers of money to the periphery, neither a continuation of the current German coalition, nor a grand coalition' of Chancellor Angela Merkel's conservatives with the Social Democrats, would imply much change in Berlin's basic stance.

So, while Germany may agree to some fudge such as extending the maturity on loans to peripheral states, we are highly unlikely to see the debt relief needed to fix the crisis, reckons the Financial Times's Wolfgang Munchau. All this implies more rancour between north and south, ongoing stagnation in the periphery, and hence further market turbulence. The euro saga will drag on and on.