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The troika announced that Greece will receive its next tranche of aid and Slovakia recently voted to ratify the EFSF. However, the sense of urgency in Europe remains elevated and the pressure is on for European leaders to find a comprehensive solution to the European debt crisis.The rescue plan being worked on now could include deeper losses for holders of Greek bonds, higher bank capital requirements, and increased power for the EFSF.
As the countdown to the October 23 EU Summit gets underway, we put together six things you can expect from the meeting via Societe Generale analyst Michala Marcussen.
The troika (EC/IMF/ECB) has already said that Greece will get its next round of €8 billion in aid. But the real challenge will be a sustainable solution that includes a privatization program that draws on international expertise, adjusting private sector involvement parameters, and increased technical assistance in implementing austerity and other changes to fiscal policy.
Meanwhile, holders of Greek debt are bracing for much higher haircuts. Marcussen thinks its important to keep participation in the program voluntary, but that would likely mean keeping the haircut to about 30%.
The IMF has placed recapitalization at €300 billion but the final number could change depending on a number of things like capital ration applied which reports suggest at 9% but could change.
Once capital requirements are set, the banks will be first be given six - nine months to make those adjustments in private markets. If that fails, the governments can step in and draw on EFSF if needed.
European Commission president Jose Manuel Barrosso has said there will be continued focus on implementing austerity, structural reforms and improving competitiveness. We can now expect new proposals to help enforce these changes but will have to wait to see tangible changes. Italy especially will be under increasing pressure to adopt austerity and fiscal changes.
Any move towards fiscal federalism will necessitate changes to the EU Treaty. Just launching the process however will offer a glimmer of hope that Europe is moving in the right direction.
Treaty negotiations typically start at Inter-Governmental Conference (IGC) and are multi-year processes.
If the EFSF could offer partial guarantees on new sovereign debt sales where needed, it would encourage private investors to stay in the market and allow them to use the €250 billion in EFSF funds that have not been earmarked so far.
A sense of urgency at the October 23 EU summit will be enough to ensure a patch on the crisis that will offer some respite from the financial stress. Right now, financial stress is expected to have a 1.5% drag on economic growth, but the economy looks to be well away from recession territory.