July 21st 2011: D-Day for the Euro and the Euro-zone? Of will it be just another useless meeting without firm decisions (Part II)

Today the leaders of the Euro-zone reached an agreement on a further bailout for Greece. The Financial Times writes on this agreement :

EU leaders agree Greek bail-out 

European leaders agreed a further bail-out for Greece worth €109bn a third of which will come in the form of debt swaps or rollovers by private sector bondholders. 

The agreement to involve private sector creditors is a political victory for Angela Merkel, Germany’s chancellor, but one that will almost certainly lead to the first default on eurozone bonds since the creation of the single currency.

At a momentous summit in Brussels anxiously awaited by investors, eurozone heads of government quickly reached agreement to lower interest rates on rescue loans to all three countries in bail-out programmes. Greece, Ireland and Portugal would pay about 3.5 per cent – 100-200 basis points lower than at present. They also agreed to extend the repayment schedules from 7 ½ years to 15 - 30 years.

In addition, they gave the bloc’s €440bn bail-out fund, the European financial stability facility, new powers to help countries not currently in bail-outs, including precautionary lines of credit and the ability to recapitalise any struggling bank in the eurozone. The EFSF will also be able to buy bonds on secondard markets in “exceptional” circumstances and subject to the approval of the European Central Bank.

President Nicolas Sarkozy of France said the changes were tantamount to the creation of a European Monetary Fund.

In addition, eurozone leaders agreed to a smaller scale bond buyback programme worth €12.6bn.

Yesterday, I wrote about today's summit: 

Welcome to the EU. 

Fortunately, this dispute will undoubtedly blow over in tonight´s meeting. Merkel and Sarkozy will probably find a settlement, although they don´t seem to like each other very much. With this settlement, tomorrows EU-meeting will be a ´success´. 

The only thing that I´m afraid of, is that this settlement is a bleeding heart agreement, that tries to keep everybody happy (i.e. the French, Dutch and German electorate AND the PIIGS-countries), except for the financial markets and will therefore be useless after all. 

Because then we´re back to square one and the interest rates for PIIGS sovereigns will soar again.

I think I can say: 'I rest my case'. Whether you call the current 'solution' a default or not is a question of linguistic usage. 


My point is that nothing is really solved and the only thing that has been bought, is time. Greece gets again more debt: that is the bottom line. 


And although the private sector now must do some burden sharing for this new aid programme and the terms and conditions of this loan are more friendly towards Greece, the fact remains that ´more debt´ can never be the solution for ´too much debt´.


Again Europe missed an opportunity to thoroughly solve the debt problem in Greece.