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Who needs details? It looks like all the financial markets wanted was the outline of a euro debt plan
10/27/2011 12:46 pm EST
How else do you explain that huge market reaction—the Standard & Poor’s 500 Stock Index is up 2.53% and the German DAX Index is up 5.35% at noon New York time today—to a plan that full of big pronouncements but very short on detail?
The grand plan announced today would require European banks to raise capitalization ratios to about 9% on a temporary basis, the European Banking Authority announced last night. That amounts to additional capital of about $147 billion, near the low end of estimates from Wall Street on what European banks need. The details on how the capital will be raised are set aside until December. Decisions on what will count as capital are punted to national banking regulators.
Negotiators for European banks have agreed to a 50% voluntary write down in the value of Greek debt. That’s above the 21% agreed to in the July Greek debt rescue plan, but below the 60% proposed by EuroZone leaders a few days ago. The details on what banks will be offered as a sweetener so that they’ll take this deal haven’t yet been announced. In the absence of details the International Swaps and Derivatives Association has said that while a voluntary plan wouldn’t be likely to trigger a credit event that would require payments on the insurance against default in credit default swaps, it can’t yet rule on this plan.
EuroZone leaders have agreed to boost the firepower of the European Financial Stability Fund to $1.4 trillion from $600 billion. Still to be announced: how the leverage will be achieved. The most likely structure is one that combines some kind of insurance guarantee with a special purpose investment vehicle designed to attract investors. Unknown at this point is the degree of insurance (25% of losses was the figure floating around last night), who would run the special purpose vehicle, and what exactly investors would get for their money. The boost to $1.4 billion is already attracting disparaging comments: It’s too small to handle Italy seems to be the general take on this part of the plan.
And finally what may be most interesting thing about what’s been announced so far is the silence on the role of the European Central Bank. There’s no mention of the central bank’s bond-buying program in the 15-page summit statement. It looks like France and Germany were finally unable to bridge their disagreement on how quickly the European Central Bank should get out of the bond buying business. But the silence is hardly likely to reassure the financial markets.
To me the worst part of this “solution” is that it isn’t one. The grand plan assumes that if the banks accept their write-downs and Greek government debt is reduced to 120% of GDP that someone that is sustainable and will end the crisis. 120% at 6% is sustainable for Greece? You’ve got to be kidding. I doubt that this plan will let Greece raise money in the financial markets any time soon—which means that EuroZone governments will remain on the hook for cash to keep Greece from default. Each payment will come with more pressure on the Greek government to cut its budget and to raise taxes. That, of course, will slow the Greek economy even more and reduce tax collections.
This agreement does indeed buy time—but I don’t see the political will anywhere in the EuroZone to use that time to come up with a plan that might really work.
Greece needs another infusion of cash in December. See you then.
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