Posted by WARREN MOSLER on October 27th, 2011
The markets like the announcement. Of course they also liked QE2…
Unfortunately, as previously discussed, without the ECB the EFSF isn’t sustainable. It’s like trying to lift up the bucket by the handle when you are standing in it.
Nor is it cast in stone yet, but all subject to details.
Also, the positive market response, if it continues, only encourages the continuing austerity measures that are weakening the euro economy and forcing already unsustainable deficits higher.
And, again, it’s a case of ‘the food was terrible and the portions were small.’
Starting with the 50% private sector loss on Greek bonds-
Presumably that ‘works’ if it indeed brings Greek debt down to 120% of GDP from 160% by 2020. But that implies the austerity measures won’t continue to reduce GDP and cause the Greek deficit to increase, as continues to be the case.
It presumes the 50% haircut will be considered sufficiently voluntary to not be a credit event that triggers a variety of global default clauses.
The rest of the ‘package’ presumes markets won’t reduce the presumed credit worthiness of member nations who fund the EFSF.
It presumes private sector funds will recapitalize the banks that lost capital on the write downs.
It presumes the EFSF won’t be needed to fully fund Portugal, Spain, and Italy.
It presumes banks and other investors required to be prudent and financially responsible to shareholders will continue to buy other euro member nation debt even after seeing the euro zone members allow Greece to default on half of their obligations.
That is, how could any bank now buy, for example, Italian debt, in full knowledge that euro zone policy options include a forced write down of that debt. And not in extreme, unforeseen circumstances, but under current conditions.
And how can prudent investors invest in the banks when they’ve just seen euro zone remove some 100 billion euro in equity by decree?
The problem is, it takes a presumption of general improvement to presume additional losses will not be incurred by investors.
And it takes a presumption of general improvement to presume the EFSF will be successful.
And that requires the presumption that continued austerity measures will result in a general improvement.
Even as all evidence (and most theory) is showing the opposite.
By Luke baker and Julien Toyer
October 27 (Reuters) — Euro zone leaders struck a last-minute deal to limit the damage from the currency bloc’s debt crisis early on Thursday but are still far from finalizing plans to slash Greece’s debt burden and strengthen their rescue fund.