July 22nd, 2011
Econintersect: The members of the European Union) (EU) have agreed on a broadly based new plan to halt the further deterioration of the financial system in the Eurozone. The plan has many of the elements reported as recently as yesterday by GEI News, including a doubling of the EU/IMF (International Monetary Fund) rescue infusion with an additional €109 billion, contributions from private sector bondholders and authorization of the EFSF (European Financial Stability Facility) to buy bonds in the secondary market if the ECB deems that necessary to maintain market stability. Follow up:
Follow up:The EFSF move could be made in case the credit agencies declared the plan to amount to a selective default. Standard and Poors suggested such action might be possible on July 4. In the event that was to happen, the EFSF purchases could prevent a precipitous bond market decline.
Optimism abounded with the EU announcement. European stocks advanced broadly, with the financials leading the way. The iShares MSCI Europe Financial (NASDAQ:EUFN) was up by 5.3%. Stocks also were strongly higher in New York. From Reuters:
The package pleased financial markets because it suggested that for the first time since the Greek debt crisis erupted early last year, the euro zone was taking a comprehensive, long-term approach to the problem, rather than simply lending Greece more money to avoid disaster in the near term.
"We have thus sent a clear signal to the markets by showing our determination to stem the crisis and turn the tide in Greece, thereby securing the future of the savings, pensions and jobs of our citizens all over Europe," Dutch Prime Minister Mark Rutte said after eight hours of talks.
French President Nicolas Sarkozy said measures agreed at the summit, the fifth this year on the crisis, would together reduce Greece's debt by 24 percentage points of gross domestic product from about 150 percent today.
Greek Prime Minister George Papandreou said the deal would cover his country's funding needs until 2020 and make its debt sustainable, but analysts questioned whether the reduction would be sufficient to avoid a restructuring in the medium term.
Not all analysis was as positive as the above. Win Thin of Brown Brothers Harriman, New York, said, “This is really just kicking the can down the road.” Thin added, “These countries need a serious hard restructuring. I do not think this is going away, and debt swaps rarely work. ” (Quotes are from Reuters.) Edward Harrison of Credit Writedowns, in an article posted at GEI Analysis, agrees with Thin. Harrison feels the “solution” is only a short-term patch. From his article:
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