It is not the first time that a high-level summit of Europe's leaders has claimed a breakthrough in providing solutions to the Continent's festering debt crisis. The emergency deal struck on Thursday at Brussels after a marathon session is comprehensive and can mitigate the rigour of the debt crisis which has threatened the financial stability of not just Europe but virtually the entire global economy. The deal has three elements. One, with a renewed focus on Greece, political leaders persuaded reluctant private banks holding Greek debt to accept a write-off of 50 per cent of their returns. This is much more than the 40 per cent “hair-cut” that banks were willing to offer. The move, which holds the key to the success of the overall strategy, is expected to cut Greece's debt burden to 120 per cent of its GDP in 2020. Without it, the debt would have risen to 180 per cent. Secondly, the corpus of the main euro bailout fund, the European Financial Stability Facility (EFSF), is being increased substantially from €440 billion to €1 trillion. This is meant to prevent market panic from spreading to other countries, notably Italy. The fund will be leveraged four to five times to enhance its fire power.
Thirdly, European banks are asked to raise about €106 billion in new capital by June 2012. Such a massive recapitalisation, it is hoped, will shield not only the banks against losses resulting from government defaults, but will also protect the larger economies such as Spain and Italy from slipping into default. The financial markets around the world have responded favourably to the news of the package. The euro has risen. While the leaders can justifiably claim to have engineered the breakthrough, it is clear that the success of the package is contingent on whether, and to what extent, Greece and the eurozone are able to convince the markets that the worst will be over soon. However, even the reduced debt burden Greece will carry till 2020 is hard to service by an economy that will be subjected to harsh austerity measures. Investors need to be convinced that the money promised for the bailout fund will in fact be available, preferably through simpler structures than what has been proposed. Finally, infusion of public money into big European banks might have boosted bank stocks, but the larger, fundamental question of whether taxpayers should bailout banks that have been reckless in their operations remains unanswered.
Greece has been singled-out, as a case study, to stabilize and guarantee sustainability of state finances under IMF/EU/ECB. Merkel objected to it more than two yars ago when Greece came under sovereign debt unsustainability rating by agencies. In a way, this is a moral problem for EU leaders. Moral hazard cannot be only ECBs responsibility, as a last resort. Having climbed this huge hill, now, what next? Federalism, transfer union, fiscal union or just further integration of the core-17 economies under Single Market and Euro.Already Commission (Brussels) has appointed Mr Ren has more or less Minister of FGinanc e responsible for monetary union and euro. Merkel and her CDU have accepted it. Will there be opposition - may be some. European Parliament is where all the action will now take place as future integration process manifests itself, including potential Treaty changes (as demanded by Merkel!). The great loser is UK's Cameron and their Conservative eurosceptics.
Why is bon market yield high then?
It is very strange that the editor has not mention about banker's bluff as charged by Chancellor Markel and President Sarkozy compelled bankers to pay 50% debt unlike US whole burden on taxpayers money.
Probably to some extent, core countries in Euro Zone have already administered to the fact that Italy and Spain, and not Greece, are the ones which can create ripples in the financial world if not brought back on track. The debt of Greece in absolute terms is not very big and can be taken care off by EU funds. But then the associated strong clause of sending strong signals of austerity measures taken has to be fulfilled by Greece. The good point for Greece is that, steps taken to stabilize the Italy and Spain will create favorable environment for Greece even though they might not be primarily meant for it. Had Greece been an isolated country, I presume it would have been left to its own and we could have seen a default !!
This is with reference to your Editorial 'A new deal for europe' (The Hindu, 29th October). The new deal is not a panacea for Euro zone problems. The austerity measures imposed by Greece will have its impact on the growth prospects of the Country. Given the gloomy picture, it is doubtful whether Greece will service its debt obligations over a period of time as stipulated in the deal. Further, along with Greece, other Eastern and Southern European nations need to observe more austerity measures to avoid any kind of unpleasant situation over a period of time. We have to wait and see how the new deal will translate into a more meaningful solution in the years to come.
This three pronged strategy that Euro Zone has crafted is in real terms a cheating with the Tax Payers by using their money to save careless and greedy bankers.Rather They should have formulated some long term policy to avoid such instances to recur instead of keeping their eye on short term safeguarding techniques.Let Greece go down and others should learn lessons from it that do not go beyond your means through Debts.
You cannot resolve the problem of indebtedness by creating more debt.
The vast increment to the bail out fund will only provide short term relief and is not a cure of the illness.
The 50% haircut of Greek debt owed to the banks is a relatively small amount to be written off and a public relations exercise to show banks are being made to pay for their fraud. Most of the money owed by Greece is to the IMF and the ECB. Greece needs to do an Argentina.
Even EU summit came out with bail out plan for Greece, European markets has not been replied positively yet, which indicates the crisis is so heavier than ever before
Unity is strength and two minds are always better than one.This has been splendidly displayed by European Union.The next very important step is to begin this plan to root out economic impediments.Well begun is half done.This may prove to be a lesson for the whole world.
The deal which is happened with Europe its good for both of the Nation for their economy and the growth of the country.The step which is taken will help to improve the GDP rate of both of the nation.
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