Europe is crawling closer to finally doing something about its bankrupt fringe countries and the impending collapse of its banking system.Namely, it’s finally talking about solutions.
The solution being talked about today by the International Monetary Fund, says the BBC, is as follows:
- Increase the EFSF (european bailout fund) to 2 trillion euros, more than quadrupling it. The EFSF would lend to countries that are having trouble borrowing money in the private markets.
- Write Greece’s debt down by 50%
- Strengthen bank capital in some undefined way.
European governments reportedly want to have this plan in place in 5-6 weeks.
Would this work?
Well, most analysts think Greece’s debts will have to be written down by 80% or more. But 50% is a reasonable start. And 2 trillion euros is a lot of euros, so that would help kick the can down the road a ways.
But the key to a real solution is restructuring all the troubled debts–not just Greece’s, but Ireland’s, Portugal’s, and others–writing down the debts on bank balance sheets and then recapitalizing the banks.
And then Keynesians like Paul Krugman would tell you that the step after that is to stomp on the fiscal and monetary gas, to help the region grow its way out of the problem.
So today’s talk is just that–talk. But at least it’s talk. For the past couple of months, Europe has basically been in denial.
And European markets are rallying on the talk.
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