The plan, thrashed out during the IMF’s annual meeting in Washington, would see the size of the eurozone bailout fund, the brilliantly-named European Financial Stability Facility, more than quadrupled to €2tn (£1.7tn). The EFSF would then be responsible for lending to struggling governments – taking the onus off the European Central Bank. It would also see a major strengthening of big banks in the eurozone, which are seen as having too little capital to absorb losses. Don’t expect that to be popular, though – not only would taxpayers potentially have to take on extra risk, but banks would have to raise new capital. Which, as we know, is expensive.
By far the most significant point, though, is that partial default/rescue plan for Greece. The idea is that Greece’s creditors will have to accept a 50% write-down on what they’re owed – in other words, half of Greece’s debt will be written off (although, bizarrely, Greece seems to be denying that any such thing is under consideration. Odd, given what other officials from the EU are saying). It’s hardly surprising – it’s been in the offing for weeks. For his part, Greek finance minister Evangelos Venizelor said that Greece will do ‘whatever it takes’ to reduce its debt. Very magnanimous…
Market reaction has been inconclusive, with a brief fall in early trading, followed by a similarly modest rally. Their qualm seems to be that, while the plan is the ‘strong and co-ordinated international response’ they were looking for, it won’t be put into action for another five to six weeks, which gives markets plenty of time to crash and burn. Although it’s also worth making the case that it’s better to have a well thought-out plan than a hastily thrashed-out reaction to the crisis.
The big question now is whether Greece will be allowed to stay in the eurozone. If this (Greece’s third) bailout is enough, the likelihood is that it’ll be allowed to stay. But if that’s not enough to re-start the economy, its future looks decidedly bleak. Which, Greek minister for international economic affairs told the Andrew Marr programme yesterday, could be disastrous. ‘I personally think it would take us back to the 1960s or 1970s,’ he said. Ouch. The only Greek who would welcome that would be Demis Roussos.