SPecIAL REPORT A CRISIS OF DÉJÀ VU How a host of divisions caused a seemingly unending string of setbacks to a deal for a new Greek bailout. First of three parts. NEW MAN, SAME STORY: Greek Finance Minister Evangelos Venizelos set off a new mini-crisis upon taking office. REUTERS/JOHN KOLESIDIS BY Luke BAKER, PAUL TAYLOR his debut at an emergency meeting of Monetary Fund inspectors. Greece needed AND DINA KYRIAKIDOU euro zone finance ministers on June 19, easier terms, he said. BRUSSELS, OCT 5 his country was teetering on the brink of “Venizelos started with excuses as to bankruptcy and desperate for more aid why they have to change some parts of the REEK FINANCE MINISTER Evangelos to avoid default. The burly constitutional programme to buy parliamentary support,” Venizelos came into office offering a lawyer began his presentation by seeking said one participant in the confidential freshG start in his nation’s financial crisis. But to renegotiate an austerity programme his Sunday-night meeting in Luxembourg. he began with more of the same. predecessor had only recently concluded The euro zone’s point man in the talks, When the 54-year-old politician made with European Union and International a normally mild-mannered Finn named octoBER 2011 DejA VU OCTOBER 2011 Olli Rehn, exploded. The EU’s executive how the second Greek bailout was reached differences among the euro zone countries, arm would refuse to sign off on Greece’s -- and why a third bailout now looks almost personality clashes among their leaders, compliance with its bailout programme, the inevitable -- Reuters spoke to dozens of denial in Greece about the extent of the 49-year-old economic and monetary affairs ministers, officials, central bankers and other problem and political paralysis that has commissioner told Venizelos. Athens would key players. threatened the economies not just of the euro get no further emergency loans, Rehn said, This report -- the first of three -- examines zone but the rest of the world. according to the participant. “I will not put the drama that played out this summer, a It raises questions about the future of my signature to the compliance report on period of just over a month between June 19 the euro zone, whose diverse make-up and behalf of the Commission,” Rehn said. and July 21, when European leaders sealed preference for compromise make speedy That moment of tension was one of many a deal they hoped would put an end to the action almost impossible. Where a sovereign as European officials grappled to find a crisis. It did not. government can take swift action, the euro fix for Greece in the first weeks of summer What emerges is a picture of cultural zone countries have held a series of meetings -- a fix that several months on has failed to ease fears in a painfully protracted drama. Today, Greece has once again fallen behind on its fiscal targets. Its economy is heading for a fourth straight year of recession in BettingEuro futures against positioning Europe 2012. Public anger over austerity, pay cuts Net long/shot non-commercial non-commerical contracts euro-futurestest contracts and rising unemployment is boiling in the $ per euro (right.hand scale) streets. And growing expectations of a 150 1.7 Greek sovereign default threaten to unleash a banking crisis in Europe and aggravate a 100 1.6 global economic slowdown. “The negative feedback loop between sovereigns and banks s 50 1.5 is materialising,” said a senior EU official in the thick of the fire-fighting. 0 1.4 As the strains mount, the battles over politics and policy are sometimes turning 1'000s contract -50 1.3 personal. In months of round-the-clock crisis management, ministers and senior officials -100 1.2 have grown physically exhausted and at times short-tempered with each other. -150 1.1 Many euro zone officials blame Greece’s 2007 2008 2009 2010 2011 lack of engagement for the crisis. Others Reuters graphic/Scott Barber 04/10/2011 point to alleged intransigence on the part Source: Thomson Reuters Datastream, CFTC of Europe’s most important political leader, German Chancellor Angela Merkel. The incident marked the start of a long, hot summer for the 17 countries that tied their destinies together with the adoption of the single currency in 1999. To better understand TIGHT SPOT: Germany’s Chancellor Angela Merkel, Europe’s most powerful leader, struggled to placate a dizzying array of constuencies. REUTERS/ERIC FRUSTRATED FINN: European Economic and Monetary Affairs Commissioner Olli Rehn exploded when the VIDAL Greeks tried to renegotiate a bailout deal. REUTERS/THIERRY ROGE 2 DejA VU OCTOBER 2011 BLACK HUMOR: Greeks are balking at the budget-slashing measures embraced by their leaders. A portrait of Greek Prime Minister George Papandreou, featuring him as a clown, was hung from a noose during a rally against a new austerity package in Athens in June. REUTERS/JOHN KOLESIDIS -- 18 so far -- without ending the crisis. Every really faded. When the “troika” overseeing JUNE 20-JULY 11: A LAUGHING STOCK twist and turn required tortuous negotiation. Greek implementation of the bailout plan -- IN THE WEEKS THAT followed, Venizelos’ Every decision had to balance pressure from the European Commission, the IMF and the education would seem like a minor hurdle in the richer and poorer nations, and from the European Central Bank -- visited the country the campaign to save not just Greece but the markets and angry voters. in February, it announced it had serious euro zone itself. Like the Greek finance minister in June, it doubts about Athens’ privatisation plan and By July 8, the Italian government’s cost sometimes seems Europe is going over the the speed of reforms. of borrowing had soared: Yields on 10-year same ground and fighting the same battles. With summer approaching, a second Italian government bonds had risen to nearly Another day, another crisis. Another week, bailout package began to look inevitable. And 5.3 percent and the premium over German another summit. Another deal, another now here was Greece’s new finance minister bonds hit 2.45 percentage points, the largest setback. wanting to undo agreements already settled. gap in the lifetime of the single currency. Other ministers at the June 19 meeting Italian share prices had fallen alarmingly. JUNE 19: A BAD FIRST IMPRESSION piled in behind Finland’s Rehn. The message: Trading was briefly suspended. THE euro ZONE CRISIS is now two years There would be no release of funds and no The markets were reassessing Italy and old. In October 2009, the newly elected consideration of a second bailout package Spain as dangerously risky investments. The government of George Papandreou unless the Greek parliament approved the third and fourth largest economies in the announced that Greece’s budget deficit was austerity programme it agreed with the EU euro zone were in danger of going the way close to 13 percent -- twice that previously and IMF and implemented laws for economic of Greece, Ireland and Portugal. And they advertised. In April 2010, with Athens reforms and sales of state assets. were too big to save with the EU’s existing teetering on the brink of bankruptcy, Greece’s “Venizelos made a bad first impression, financial toolkit. euro zone partners and the International but he is a quick learner,” the participant The 11-year-old single currency project, the Monetary Fund agreed a rescue package of said. “The next morning, he got on the phone most ambitious achievement in six decades 110 billion euros ($146 billion). to the president of parliament and said they of European integration, was threatening to By May this year, as Europe battled to had to use emergency procedure to push the unravel. stop the Greek disease spreading, both privatisations through.” The Greek finance When the 17 euro zone finance ministers Ireland and Portugal had received their own ministry had no immediate comment on met again in Brussels on July 11, Italy seemed bailouts. But fears over Athens had never Wednesday. to be teetering. The southern European 3 DejA VU OCTOBER 2011 MUDDLE AND MOCKERY: Europe’s leaders have been skewered as the crisis drags on. Oxfam activists wore masks depicting (L-R) German Chancellor Merkel, French President Nicolas Sarkozy, Italian Prime Minister Silvio Berlusconi and British Prime Minister David Cameron in Brussels in June. REUTERS/YVES HERMAN state has the largest debts in the euro zone, at 1.9 trillion euros -- 120 percent of gross domestic product. Market turbulence TheEuro pricezone bond of profligacy yields there was compounded by a political crisis. 10 year government bond yield - percent test Prime Minister Silvio Berlusconi, who was 25 on trial on charges of corporate corruption Greece and paying for sex with a minor, was now Portugual publicly at loggerheads over budget cuts 20 seeks aid with his economy and finance minister, Giulio EU backs Irish bailout Tremonti. Greece asks for It was nearly midnight when Rehn and the 15 EU/IMF aid chairman of the euro zone’s finance ministers group, Jean-Claude Juncker, sat down to Portugal report to the press corps on the outcome of 10 the summit. Ireland Juncker, a heavy-smoking 56-year-old Italy who also serves as Luxembourg’s prime 5 Spain minister, adjusted his glasses, cleared his throat and read very deliberately a six- 0 paragraph statement that was long on 2010 2011 generalities and short on specifics.T here was Reuters graphic/Scott Barber 04/10/2011 Source: Thomson Reuters Datastream silence as the 100 or so journalists parsed an announcement that had taken nearly eight while Juncker tried to joke his way out of the ministers wouldn’t be able to find a solution.