You would’ve had to have beenmarooned on a desert island, cut off from the outside world, not to have noticed that Euroland has had a debt crisis on its hands. It is difficult to comprehend how the crisis has managed to drag on for two long years, pretty much since the EU discovered that Greece had borrowed beyond its means. But it has. The solution from Brussels was to lend even more money to Athens and to hope the problem would go away. But it hasn’t.
At the time of writing EU leaders are hammering out a grand unified plan that will oversee an orderly partial default by Greece. At the same time they will reveal the scope and structure of a beefed-up European Financial Stability Facility that will prevent other Eurozone governments – notably Italy and Spain – finding themselves unable to fund their debts. A broad reinforcement of banks’ capital resources will also be part of the deal.
Let’s consider what the plan could mean.
First, and essentially, it will mean losses for the holders of Greek government bonds. There is no point in lending more money to Greece when it cannot even cope with its existing borrowings. It will mean more government money for European banks and more disgruntled voters, especially in Germany. It will mean higher borrowing costs for Euroland governments in general, especially for France, which could well lose its AAA credit rating as a result of increased commitments to the EFSF pot.
As for the Euro itself, it is likely that the debt resolution will achieve little or nothing. There will still be nervousness about Italy and Spain and the Euroland economy will be held back by the diversion of cash to the various bailouts. Intriguingly, after all the fuss, the Euro, the Pound and the US Dollar are in identical positions today to those they occupied a year ago. There has been movement along the way but no net change. It is not impossible to imagine that the new EU plan will perpetuate that stability.