After 10 hours of negotiations, European leaders finally agreed on a bailout plan to cope with the eurozone debt crisis. Grateful investors welcomed the news and stock markets rallied.
The key issues hammered out are that Greek debt will be halved as private investor bonds will be valued at 50% less and the euro bailout fund increased. The Guardian explains the main details of the bailout package in easy to understand bullet-point form:
- A 50% cut in Greece’s private sector debt to reduce its borrowing burden to 120% of national output by 2020.
- Europe’s banks to have a minimum capital buffer of 9%, forcing them to find an extra €106bn by June 2012.
- A fourfold increase to at least €1 trillion in the European Financial Stability Facility (EFSF), the fund designed to prevent the debt crisis spreading across the single currency, with an attempt to persuade countries like China to provide some cash.
- A pledge by Italy to make structural change to insulate the euro’s third biggest economy from speculative attack.
News of the bailout plan sent finance markets — and the Australian dollar — soaring. The Dow Jones closed at 12,208.55, the first time it’d hit over 12,000 since August. The Australian dollar reached $1.07 against the US. The Nasdaq jumped 3.32%.
It was partly pure relief from investors that sent markets rising, suggests Landon Thomas Jnr in The New York Times:
“Investors on Thursday largely cheered Europe’s broad agreement to address its sovereign debt crisis, choosing to celebrate the fact that the Europeans finally agreed on something as opposed to the thornier question of how the plan is to be carried out.”
Will it be enough? As market analyst at CMC Markets, Michael Hewson, says in The Guardian:
“The question is whether it will be enough in the long term, or whether it has merely put off the day of reckoning, for a little while longer. While we now have some numbers to go on it will be all rather pointless of leaders don’t find a way to stimulate growth and we still have the question of Italy’s finances.”
Jack Ewing in The New York Times agrees, noting that Italy’s instability is now the key issue:
“The big problem is that Italy, with its dysfunctional politics and nearly €2 trillion, or around $2.8 trillion, in outstanding debt, has supplanted Greece as the biggest threat to European banks and the biggest source of investor anxiety. If Italy were to have trouble servicing its debt, no amount of fresh capital could protect the European banking system.”
Greece wasn’t in a stable enough financial position to join the euro when it did a decade ago, said French president Nicolas Sarkozy. “It was an error because Greece entered with false [economic] figures … it was not ready,” Sarkozy told a French news program.
Watching this eurozone crisis unfold is like being forced to live in Bill Murray’s Groundhog Day — “… will I wake up tomorrow listening to the same euro zone version of I Got You Babe, sung by Nicolas Sarkozy and Angela Merkel?” asks Michael Schuman, from TIME’s Curios Capitalist blog. Schuman examines the good, the bad and the ugly in his post about the plan. Some of the bad?
“As has been the custom, the plan is ultimately no more than a politically determined collection of half-measures. With voters at home turning more and more sour on euro bailouts, the zone’s leadership has attempted to tackle the crisis with hardly any new money being put on the table. And, as the saying goes, you get what you pay for. The bank recapitalisation plan calls for banks to raise 106 billion euros ($150 billion) in fresh capital. But that’s about half what private estimates say is necessary, so it’s unlikely to be a final cure for Europe’s banking woes. Nor is it clear what role European governments will play in providing that capital.”
This latest deal is largely thanks to German chancellor Angela Merkel, argues Roland Nelles in Der Spiegel:
“Merkel has presented herself as a good European. At the same time, she has neutralised two antagonists. She is now leading the competition with Nicolas Sarkozy for leadership of Europe.”
The focus may be on Europe, but China will be instrumental in rescuing the eurozone, report Jamil Anderlini and Richard Milne in the Financial Times:
“China is very likely to contribute to the eurozone’s bail-out fund but the scope of its involvement will depend on European leaders satisfying some key conditions, two senior advisers to the Chinese government have told the Financial Times.”
I find this whole fiasco highly amusing. There are still lots of holes in this one and it is indeed looking more and more like groundhog day as Michael Schuman puts it except, alas, without Bill Murray
Bailout or postponement?
As I posted on the Guardian:
The thing about that analogy is that we all know how the movie ended. Bill Murray finally did learn the moral lessons. He eventually did wake up to a new song on the radio, he got the girl next to him in the bed and had learned, not only a whole bunch of useful skills but one really important lifeskill.
OK, don’t ask me if I believe the Greeks and Italians have learned enough yet–principally how to pay and collect taxes–but how else does anyone think they were going to learn?
And these Mediterranean types always blather on about the family. Well, this is their frosty rich northern uncle rescuing them from their profligate ways. They’ve been given one more chance to stay in the safe warm embrace of the eurofamily.
that is hilarious:
“China is very likely to contribute to the eurozone’s bail-out fund but the scope of its involvement will depend on European leaders satisfying some key conditions”
I think China and the other developing countries that are contributing to the fund should all line up and stipulate various conditions.
I wonder if in 5 – 10 years the US might be in a similar state…
Indeed, this is hilarious. “This is not a credit event”, because apparently all private investors are taking a 50% haircut “voluntarily”! Ha! So instantly all CDS contracts are deemed worthless.
Manipulation of the very highest order. Let the fun begin.