September 26th, 2011
04:40 PM GMT
London (CNN) – So, the word is eurozone leaders may be ready to quadruple the region’s bailout fund and write down 50% of Greece’s debt. This, as a final fix for a crisis that continues to overshadow the single currency a decade after its introduction.
Investors reacted with cautious optimism thanks to the sheer size of the financial commitment and finally an acknowledgement that Greece doesn’t have a hope of paying off all of its existing obligations.
As ministers move to hammer out a concrete plan, investors point to a few questions that still remain unanswered:
1) Will it be enough?
2) How soon will the measures pass?
3) Is it too late?
If the euro area can increase the size of its European Financial Stability Facility, or bailout fund, to the $2.7 trillion its politicians are reportedly discussing not only would that be “serious money” as one economist put it today but crucially the fund would be just about big enough to support some of the bigger peripheral nations facing the eye of the storm like Italy and Spain.
Giving European leaders a nudge in the right direction was the International Monetary Fund. The world’s bank of last resort, which has played a pivotal role in providing financial assistance to Greece, Ireland and Portugal, said that it would support the eurozone but warned it might not have enough cash to help everyone.
The amount of financial assistance that could be required is gargantuan. The eurozone is now a trillion-euro problem rather than a billion-dollar issue and one which has even given U.S. Treasury Secretary Timothy Geithner the odd sleepless night.
Yet some economists have repeatedly questioned whether Europe’s leaders would have needed to put aside quite so much cash, if they had been quicker in showing strong support for a faltering member and its banks.
As for the banks themselves. Many financial institutions in Greece, France and Germany would stand to lose billions should a 50% haircut be imposed on holders of Greek debt. This is why part of the plan reportedly discussed in Washington would also involve recapitalizing stricken lenders, effectively neutralizing their downside and preventing a run on euro deposits by customers.
Nick Parsons, chief market strategist of NAB Capital in London, says investors in Greek debt may see the value of their holdings drop by as much as 75 percent.
‘’We are looking at the process of an orderly default,’’ he says.
‘’We don’t expect Greece to leave the single currency. It will remain a member of the euro but the creditors who are owed money by Greece will not be repaid,” he says.
Adding to the confusion is the desperate reassurance from Greece’s own finance minister saying his country will do everything it can to meet its obligations.
As one investor put it to me today: “Is Greece the only one in denial about its imminent default?”’
In the meantime, the cost of insuring the country’s sovereign debt- as measured by credit default swap contracts – shows the markets are still pricing in a 90% chance of missed repayments.
Greek politicians and economists agree they will face a cash crunch perhaps as soon as next month, meaning Europe’s politicians have precious little time for debate.
Still, any plan would have to be ratified by all 17 member states and that could take up to six weeks.
Greece is still waiting on its next instalment of financial assistance from the Troika – a body comprising the European Central Bank, the European Union and the International Monetary Fund amid fraught negotiations about cuts and tax hikes.
Eurozone countries this July agreed to expand an original bailout plan put forward in May 2010 but that move still has to make its way through a Germany parliament weary of bailing out its profligate European brothers.
Other euro users like Finland have stipulated their own demands in return for extending future assistance to Greece, demanding collateral for loans. That may be fine for Finland but such terms are unrealistic for all countries contributing to Greece’s financial future.
Against this gloomy backdrop economists are also at odds over whether austerity truly is the appropriate one-size-fits-all solution for the different ailments facing euro zone nations today.
Severe austerity, coming too late, in Greece is likely to contribute to a 5% economic contraction for this year.
Add to that the rate of inflation, future job cuts and tax receipts collected to pay down the country’s deficit some say will likely be worth less and less.
Athen’s economic reality today provides a lesson for the eurozone’s outlook tomorrow.
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