5. The United States keeps quiet. Here's a not-so-well-kept secret: The United States doesn't possess the inclination, the ideas, or the financial capacity to materially influence the endgame in Europe. Here's an even less-well-kept one: The White House is enormously concerned about a European implosion damaging the fragile U.S. economy and taking President Barack Obama's reelection chances with it. The Federal Reserve has played an enormously important and somewhat unsung role in Europe, keeping large U.S. dollar swap lines open for the European Central Bank that have been crucial for supporting banks in the European periphery. But the Obama administration maintains a public stance that the Europe crisis is largely for Europe to solve on its own. Not only are U.S. coffers empty, but even benign efforts to think creatively about ways to address Europe's problems often meet with public criticism on the continent, with the oft-repeated refrain "Get your own house in order first."
In any case, despite Obama's speech last Friday, June 8, you won't hear much about Europe on the campaign trail. The president will limit talk about it for fear of highlighting America's inability to solve a major economic crisis with its European brethren, while Republican presidential candidate Mitt Romney doesn't want to appear to give the president an "out" on responsibility for any setbacks in the U.S. economy. All in all, Washington will be speaking softly, but without any stick to back it up.
6. Rating agencies get tough. Let's face it. More often than not over the past two years, the "solutions" presented by European leaders to drag the eurozone back from the abyss have involved more than a dollop of ambiguity. European leaders have announced big headline numbers at the last minute to calm markets, almost always on weekends (see Spanish bank announcement on Saturday) and sometimes in the dead of night on an early Monday morning just before Asian markets open, as was the case with the creation of the European Financial Stability Facility (EFSF) and its successor, the European Stability Mechanism (ESM). But regardless of when these announcements are made, these crisis responses usually are based in large part on rhetorical announcements designed to trigger a favorable market reaction, not on binding financial commitments backed up by real cash.
Grand pronouncements have worked fairly well and may continue to do so -- but only until third parties like credit-rating agencies pull back the curtain and expose the schemes for what they are. Having suffered serial blows to their credibility during the 2008 financial crisis and beyond, the credit raters are more determined than ever not to let the smoke get in their eyes, especially as they face increasing criticism from politicians seeking to limit their authority and influence. But shooting the messenger is not likely to solve Europe's problems. Engaged and independent rating agencies may provide more clarity to markets but also make political deals with embedded ambiguity or internal inconsistencies -- which are often necessary in the absence of consensus -- harder to craft and implement.
7. The fracturing troika. Throughout the crisis, the IMF has sought to maintain its critically important independence and market credibility while working closely with the European Central Bank (ECB) and the European Commission (EC) and its member states. Now, ECB-EC-IMF tensions revolve around something much simpler: who pays.
Greece owes more than 300 billion euros to its official sector lenders, and regardless of the outcomes of the Greek elections, the country's ability to pay it all back is seriously doubtful. Someone will have to bear the brunt of these losses, and the private sector, which took a large haircut in the recent restructuring, no longer holds enough debt to make much of a dent in any future restructuring that may be necessary. But with the IMF asserting its "preferred creditor status" and the ECB claiming a newly created level of seniority just below the IMF (and refusing to discuss anything that it deems to violate its prohibition against "monetary financing"), that leaves European governments holding the bag.
And that's just for Greece. Add in the potential costs of Spain and Italy and the ongoing assistance to Portugal and Ireland, and the numbers get pretty big pretty fast. What's more, neither of the funding programs the EU governments have set up -- the EFSF and the ESM -- have any significant capital. They both rely on capital markets, leverage, and to some extent "alchemy" to reach their headline funding capacity. At some point, bonds need to be redeemed and debts paid. The Spanish bank recapitalization plan just announced is noteworthy as it does not include funding commitments from either the ECB or the IMF. It could well be the shape of things to come as the appearance of a harmonious troika is likely to come under increasing internal strain as the music comes closer to stopping and there aren't enough chairs to go round.
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