Not So Fast on the Magic Solution for Euro Troubles By Sunday
This is the week for action on resolving the European bank crisis (not really a sovereign debt crisis), the WSJ headline blares. The deadline is October 23, as was written. This time a week from now, it’s said, we will have a comprehensive solution coming out of a meeting of European leaders, and this unpleasantness will be behind us.
That optimism lasted about three hours today, before Germany started backtracking.
Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.
German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”
Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging plan to avoid a Greek default, bolster banks and curb contagion. Providing a week to act, they set the Oct. 23 meeting of European leaders in Brussels as the deadline.
On the summit agenda is how any recapitalization of Europe’s banks “might be carried out in a coordinated way” and how to make the European Financial Stability Facility, the EU’s rescue fund for indebted states, as effective as possible, Seibert said. The leaders will also discuss aid for Greece and ways to tighten economic and financial policy, he said.
European stocks dropped on Merkel’s deflating comments.
The issues are enormous, and suffused with crosscutting political coalitions as well as competing interests among stakeholders. One key component involves forcing Greek creditors to take a bigger haircut on Greek debt, in what amounts to a partial default. European leaders want the haircut to be as high as 50%. Needless to say, the banks that own much of the debt don’t want that.
Another component is a demand for higher capital from the banks affected by the Greek default. Some of that would come from national governments and perhaps the newly bolstered European bailout fund, the EFSF. But some would have to come from forcing the lenders to add to their own capital reserves. Needless to say, the banks don’t want that.
The governments that would be on the hook for bailouts of either the banks or the sovereigns (with the money going to the banks) would be committing unpopular actions with their populations. In addition, the countries being bailed out would probably need to impose more austerity on their populations in return, also an unpopular move.
And nobody really knows how growth in the Eurozone can possibly result from all of this, outside of some hand-waving. Further, since the EFSF probably has to be four times as large as it is now to guard against the Greek default becoming a contagion, and it was hard enough just getting to the current level, there’s no real understanding of how to get there from here, outside of using some crazy CDO-like scheme that is ridiculously dangerous.
Other than that, I’m sure they’ll solve this by Sunday.