Problem Solved? EU Agreed On Greek Debt Haircut And EFSF Leveraging27 October, 2011, 14:51. Posted by Zarathustra
Tags: Economy, Euro Crisis, Europe
So after the summit, this is the statement which suggests that the problem is solved.
The deal includes deeper haircut on Greek bonds, increasing from 21% to 50%, which should reduce the debt/GDP ratio to 120% by the end of 2020 (i.e. the same figure as in the Troika report). The agreement will also include €130 billion bail-out of Greece. On top of that, the firepower of the €440 billion European Financial Stability Facility (EFSF) will be increased by providing credit insurance to new debt issued by member states (see the European Sovereign Insurance Mechanism for some background), and the firepower of the facility will be increased by 4 to 5 times according to the FT.
And the market seems to like it, so far.
Of course, I am not hugely impressed by that. Greece’s problem might have been solved (for now anyway, because we are left wonder how 120% of GDP of debt is really that sustainable for Greece), we still have Spain, Portugal, Italy, and Ireland. On top of that, if the European economy is going into a recession, which is actually very likely, many of their assumptions on debt, I believe, will be invalid after 3 months.
So, as Paul the Eurosceptic Donovan said, we can have 5 years of rolling crises in Europe. We can be made to believe that the problem is solved, but it will re-emerge a few months ago, probably in a different form, or with another country in the centre.