Europe: Deal Done, Sort Of
After a marathon negotiation session that lasted well into the night, European leaders released a statement outlining the broad terms of a new deal to rescue Greece and contain the debt crisis.
Here are the three main points of the deal:
- Restructure Greek debt: private banks agree to a voluntary 50 percent reduction of Greece's debt. The leaders "invited"private investors to participate...some invitation--if you don't participate, how about Greece pays you zero? Eurozone members will contribute an extra €30 billion to facilitate the process.
- Increase European bank capital buffers: Eurozone banks will have to meet a 9 percent capital ratio by June 30, 2012, amounting to additional €106 billion ($150B). Banks in Greece, Spain and Italy have the most work to do, as they account for about two-thirds of the amount to be raised. If banks can't access private markets to raise the money, the plan does not specify how the public sector will aid the struggling banks.
- Leverage the €440 billion European Financial Stability Fund ("EFSF") to nearly €1 trillion ($1.4T): there will be two facilities that will be used simultaneously (1) insurance issued by Eurozone states, which will be offered to private investors as an option when buying bonds in the primary market. This would allow the EFSF to indirectly cover the initial losses that buyers of Spanish and Italian bonds would suffer in the event of default. (2) a private-public Special Purpose Vehicle, which "will enlarge the amount of resources available to extend loans, for bank recapitalization and for buying bonds in the primary and secondary markets. ("Hello President Jintao? This is Sarkozy...have I got a deal for you!")
So crisis averted, for now. Not to be a Debbie-Downer, but the core problem still exists -- the leaders even acknowledged it in the statement:
Being part of a monetary union has far reaching implications and implies a much closer coordination and surveillance to ensure stability and sustainability of the whole area. The current crisis shows the need to address this much more effectively. Therefore, while strengthening our crisis tools within the euro area, we will make further progress in integrating economic and fiscal policies by reinforcing coordination, surveillance and discipline. We will develop the necessary policies to support the functioning of the single currency area.In other words, we still have no way to connect a common currency with coordinated fiscal policy. Until we figure that part out, the Eurozone could encounter subsequent crises.
