September 26th, 2011
04:40 PM GMT
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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.

soundoff (20 Responses)
  1. allen

    where's money gone? Gonverment should deal with lending issues in each euro zone rather than putting messes across euro bearers. Europe though united by as union of one currency, but the regime had their own policies treating debt issues. If they could act together, there would be no crisis at all. Maybe this idea is naiive.

    September 27, 2011 at 3:59 am |
  2. Paul Johnston, PhD Economics

    BAILING OUT GREECE who lied their way into the EU IS THE FRAUD OF THE CENTURY. THE EU, IMF and ECB are run by criminals like IMF's Lagarde who is under investigation for Financial Fraud - Time to say NO, and stand up and fight for your rights People

    September 27, 2011 at 5:14 am |
  3. Henk

    Great and inspiring news. I will never go back to the dark ages of changing currencies every time i cross the border into France, Belgium, Germany, Holland etc. Europe is to small for that dark age nonsense. Anything can be made to work if you keep trying to improve it. If the pessimists ruled the World we would all be living in Caves. They can go F themselves.

    September 27, 2011 at 8:33 am |
  4. Steve Thompson

    Here is an article outlining the world's entire sovereign debt problem, most of which has been accrued by developed nations:

    The sovereign debt for the world's developed economies is anticipated to rise from 91 percent of GDP at the end of 2009 to 110 percent in 2015, an increase of 37 percentage points since the beginning of the Great Recession. There is no way that the IMF, World Bank, ECB or any combination of the above can bail the world out of this mess.

    September 27, 2011 at 12:45 pm |
  5. Paul Johnston, PhD Economics


    October 6, 2011 at 10:22 am |
  6. Manfred

    I think we all know what is going on. The west has been using the World bank & IMF to make the west richer when the rest of the world most Africa is going down hill.
    This is the end of all your fraud. I am very suprise the you have not been able to see that this is the end. if you can write down 110% of Greece’s debts it will not still help , it will only help to bring down the only nation in the EU that is doing well.( Germany)

    October 12, 2011 at 8:56 am |
  7. Paul Johnston, PhD Economics


    October 13, 2011 at 1:56 pm |
  8. Darren

    o look another anti EURO story from CNN , what a surprise NIOT. The US dollar is in worse shape.

    October 14, 2011 at 7:59 pm |
  9. Roelof

    That EU fund isn't going to solve anything, just the symptoms, the core problem is the eurozone. There should be 2 eurozones. One for the South and one for the North. Or just everyone should have their own currency again. When you look at Greece, that euro is way too expensive for them and second they don't want economical reforms. Everytime they need to make cuts, nobody is working in Greece.

    October 22, 2011 at 6:16 am |
  10. Roelof

    @Paul Johnston Greece is a souvereign state and voted for those thieves in the Greek government. It are the Greek to blame who they are voting for. And the Greek got 200 billion euro savings on Swiss bank accounts. Maybe the Greek should lose some autonomy on those and bail themselves out.

    October 22, 2011 at 6:21 am |
  11. charles johnson

    If you or I were insolvent, no bank would loan us money. So, why is a country any different? I believe it is time for the Greek's to solve their own problems. They are the ones that caused the situation.
    As an example: I have read that 10% of the workforce in Greece works directly for the government compared with 2.5% in the U.S.. I think it is obvious what has been going on. For the Greeks to believe that they are being taken advantage of is ridiculous and is their way of blaming someone else for their problems.
    I also believe that the EU is afraid to not bail them out for fear of the repercussions. I do not believe that giving more loans to a country that lied in the first place to enter the union and is continuing to lie to obtain more loans is a solution to the problem. In the end the result will be the same and more loans will threaten the stability of the union.
    We made a mistake admitting Greece, but that does not mean we can afford to have them drag the rest of us down. Italy, Spain, Portugal and Ireland are honorable countries that deserve the help, By contrast, I don't believe Greece has acted in an honorable way.

    October 22, 2011 at 3:06 pm |
  12. Dantx10

    The European union is a failed union.

    October 26, 2011 at 6:59 am |
  13. Sol Invictus

    Nice headline.
    You cant put more hate against the EU in one sentence.
    Bunch of backstabbers.

    October 29, 2011 at 7:38 pm |
  14. Germany

    the only nation that is doing well???? I am German. Nothing is doing well here. No money for schools, no money for streets, no money for healthy, no money for children. No jobs. BUT money for Greek. Money for the complete EU. OUR DEBT IS ENORMOUS. The only nation that is doing well? Is there any other hidden Germany? This Germany lives on a razor-edge.

    October 30, 2011 at 5:53 pm |
  15. Paul Johnston, PhD Economics

    Get rid of Greece's corrupt political Leaders who have been robbing the country blind. Soon the people will REVOLT and all these criminals will be held to pay and the Greeks will leave the EU and bring back their Drachma!

    October 31, 2011 at 5:34 am |
  16. Elimar

    No collateral for loans no money let them go and take care about there own problems, they don't wan't help they only like to complain and strike, what about the millions of money which was shipped to the Swiss Banks, let them feel how it is when you take loans you have to pay else you are done, so let them be done else more will loose, like in the US housing market.

    October 31, 2011 at 5:36 pm |
  17. Dirkje

    What a pack of non-sense from these Anglo-Sakson analist. It was the US Goldman Sachs which helped Greece to develop their fraud schemes.
    BTW would somebody think that Greece can default their debt by going to a currency of their own. Forget it, they still need to pay their debt in Euro. Congratulations. They better cranck up their productivity and start paying.

    November 4, 2011 at 9:08 pm |
  18. Imperialist

    I give it three years till someone shoots an Austrian bank CEO and nature takes it's course.

    November 16, 2011 at 2:18 am |
  19. Paul Johnston, PhD Economics


    November 22, 2011 at 5:36 am |
  20. Andreas

    I am a Greek citizen, working hard in the private sector, and I am facing the Greek debt crisis. Lets discuss if anyone is interested, call me on Skype: andreas.s.andreou

    November 26, 2011 at 3:17 pm |

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