Photo: Spacepleb, Flickr
Forget the bickering over the debt ceiling in the US; that’s a side show to the main event right now, which is the attempt of the eurozone to fix its markets before the whole currency zone melts down. The results of today’s much-awaited European financial summit are now out, and they’re . . . underwhelming. Basically, both the Greek bonds owned by banks and insurers, and the loans Greece has received from the European stabilisation fund, will have their terms extended as far as possible. The ratings agencies are going to call this a selective default (only the ratings of bonds which are part of the private debt swap will be affected), which for reasons that are not clear to me, is supposed to only last a few days before the debt swap actually starts to raise their credit rating. The European Central Bank will waive its rules against accepted defaulted collateral, so hopefully, the Greek banking system will not melt down. The austerity plan will go forward as previously outlined.
Maybe this works for Greece, although I’m kind of sceptical. The internets seem to think that the deal on privately held bonds represents a roughly 20% haircut on Greek debt. This debt swap solves the problem of the upcoming roll overs, which were going to be catastrophic at the double-digit interest rates that Greece would currently have to pay. But even with longer terms and lower interest payments, the budget gap is still going to be pretty huge. l I’m not sure this plan solves the political problem of cutting domestic spending in order to pay foreign creditors . Nor the economic problem of pegging Greek monetary policy to Germany’s.
But even if it maybe kind of works for Greece, what about the rest of the Eurozone periphery? For them, this plan amounts to saying “austerity will continue until morale improves”.
The spreads on Spanish, Italian, Irish, and Portuguese bonds are not widening because investors think that Greece needs a debt swap, or because the solons of Brussels haven’t made enough announcements about the virtues of budget-cutting. They’re widening because there are questions about whether these countries–or Europe–have the economic means or the political will to ensure that investors get paid back.
This plan doesn’t answer those questions; aside from what seem to be extremely minor changes to the stabilisation fund’s intervention rules, it just reiterates that austerity is going to be awesome, and that the rest of the PIIGS spit shake and pinky swear, cross their heart and hope to die, that they won’t default on their debt. It does not put an adequate backstop behind Spain and Italy, whose bond yields have been steadily rising; it does not even try. Yet this has always been the real threat to the euro zone, not a Greek default.
Of course, maybe I’m missing something. But I’ll be surprised if this even buys the periphery much breathing room.
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