On the road to recovery - The final EU summit decision

Article published on Oct. 27, 2011
Article published on Oct. 27, 2011
By Lisa Kittel Photo: Nikolas Konstantin On her way home. A self-imposed deadline to help avoid panic in the financial markets: The heads of state wanted to present the results of their meeting last night before world stock markets opened. It took until almost four o’clock to convince private investors and banks to give Greece a 50% haircut.
A disaster for banks – all in all they stand to lose 100 billion – but an important step forward saving in safeguarding the future of the eurozone.

How did Merkel and Co got the banks to agree to this? Apparently they held a pistol to their heads. If they hadn't agreed, there would probably have been a forced haircut. Merkel: “ We only made one proposition and told them that it was our last.” Nevertheless they had to calm private investors at least a little, and promised that the EFSF would cover 30 billion of the debt.

Hard measures, and they were necessary.Through the radical haircut the Greek debts shall be dropped from 160% to 120% of gross domestic product. All that by 2020. Thereby Greece gets the chance to go without further external financial help.

What may happen is that the 50% debt reduction won't concern the European states nor the ECB. Therefore they agreed to help Greece with a further 100 billion until 2014. This money shall also be used to strengthen Greek banks which find themselves in trouble because of the refunding. A further decision concerns the recapitalization of all private investors which are in danger of collapse because of high losses.

In mid-2012 they shall raise their capital ratio from 4% to 9 %, which means they should save quickly and directly accessible money in case of emergency. This would happen through a cash infusion of the owner, money from the capital market, and, in a second or third step, through the governments or the EFSF.

Even if the Euro zone countries decided to let the stock market wait, they didn’t do things in half measures (and even Berlusconi proposed a convincing reform program): the debate about a EFSF transformation produced a result. From the 440 billion of the EFSF, there is 250 billion not booked up yet. That amount shall reach the power of one trillion.

How? If EU states sell bonds to raise cash, the EU will want to act as a guarantor of 30% in case the prevailing country crashes. Whether or not this is enough motivation for investors will be seen next Thursday when Sarkozy has a first meeting with Chinese Prime minister Hu Jintao.

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