Euro zone crisis tracker: What you need to know this week—Oct. 1

Our crisis tracker boils the flood of euro-zone news down to the handful of questions that, each week, will most determine the fate of the European currency union.

Week beginning October 1, 2012

Will Greece get more bailout aid?

Likelihood: Looks good

Why it matters: Greece is yet again a big story. Last week, the country’s fragile coalition agreed on most of the €13.5 billion ($17.4 billion) of budget cuts required by international creditors including the European Commission, the European Central Bank and the International Monetary Fund (known as the “troika”), in exchange for more multi-billion-euro aid installments. It’s been a tense few weeks in Greece. While politicians wrangled, police officers, military personnel and judges walked off their jobs to protest the cuts. Protests turned violent amid general strikes that had shuttered businesses and public services. This week doctors, lawyers and plumbers—self-employed workers targeted by new measures—are expected to join the fray. Without further aid, Greece risks defaulting on its debt, being expelled from the euro zone, and suffering swift economic collapse. This isn’t going to happen, suggest stories in the German press this past weekend. European leaders, concerned about a domino-effect that could result from such an exit, will overlook budget shortfalls and the slow pace of reforms, and get Greece its money.

What to watch: Negotiations with troika members are supposed to resume this week. Meanwhile Greece’s finance minister, Yannis Stournaras, meets with his European counterparts on October 8 to present austerity plans in detail. A final decision about Greece’s fate should come on October 19 at the European Union summit. Greek officials are expected to request that their restructuring program be extended until 2016 to offset the effects of harsh cuts and help their economy recover.

Will Spain’s prime minister finally ask for a sovereign bailout?

Likelihood: Very likely

Why it matters: Spain too is back in the spotlight after its government released a new austerity budget last week aimed at slashing €40 billion from its 2013 budget. A day later, an independent review of Spain’s financial sector said banks were “mostly solvent and viable” and needed about €60 billion to recapitalize, in line with expectations. Investors and EU officials seemed mollified, but concerns remain that Moody’s could downgrade Spain’s rating to junk bond status. The sovereign review by Moody’s could come any day. If Spain is downgraded, pressure will grow, along with borrowing costs, for the country to quickly request a sovereign bailout.

What to watch: Moody’s review due out this month.

Will capital flight become the euro zone’s next big problem?

Likelihood: Very likely

Why it matters: Despite relatively good news from Spain’s banking review (if you can consider a €60 billion bailout good news) the European Central Bank (ECB) released data last week revealing a capital flight problem for Spain’s banks with private sector deposits falling in August more than 1% to €1.49 trillion, reaching their lowest point since April 2008. The story of capital flight is hardly new—as uncertainty grows, capital flees— but numbers appear to be reaching worrying levels. A recent report estimated €326 billion came out of banks in Spain, Portugal, Ireland and Greece in the the 12 months ended July 31. This capital flight coincides with an increase of about €300 billion to lenders in seven countries including Germany and France, leading to a two-tiered banking system. This can’t be good news for economic recovery.

What to watch: ECB data on capital flight.

Will massive street protests against austerity change anything?

Likelihood: They already have, at least a little bit

Why it matters: Last week, the number of people protesting austerity measures rose exponentially in euro zone countries with people taking to the streets in Italy, Greece, Portugal, and Spain. Some protests grew violent like in Greece and Spain. Others were general strikes that saw doctors, judges and even military personnel walk off their jobs and march through the streets. It’s easy to see why everyone’s so tense. While euro zone inflation is rising (2.7% according to the latest annual estimates) and unemployment is in the double digits in the hardest-hit countries, euro zone governments are hacking away at social spending. The timing isn’t great. The question, though, is are these protests having any impact? One example comes from Portugal where the government backed off a plan to hike social security contributions. Otherwise, the answer is wait and see.

What to watch: Whether the Greeks cave to popular demand and back-pedal on various social welfare cuts.

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