Friday, July 22, 2011
A short-term euro fix
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

European leaders went further than expected in their response to the eurozone crisis. Whether the Brussels summit meets Christine Lagarde's descritpion of a "game changer" remains to be seen but it has done what was vital, which was to buy time, and to rescue a second Greek rescue, with 109 billion euros from official sources and up to 50 billion from the private sector, including a haircut for the banks of up to 21%.

Questions that still need to be answered include:

Will the EFSF (European Financial Stabilisation Facility) need to be increased to take on its new role of stepping in early?

Will the fact of the EFSF stepping in itself generate alarm?

Will the change in terms on Greek, Irish and Portuguese debt be regarded as a default by the ratings agencies?

Does it take the prospect of Spanish and Italian contagion off the table, as the initial market reaction appears to suggest?

More details of the package will be provided by Manuel Barroso, the president of the European Commission, at noon.

Thee are still huge questions about the sustainability of the debt position of Greece and others. These countries are still very uncompetitive within the euro. But this has bought time.