Saturday 16 December 2017

Europe sticks to 'extend and pretend' tactic

AS European leaders struggle to "solve" the euro crisis, will the proposed measures do the trick?

With the sovereign debt crisis on the eurozone periphery having morphed into a banking crisis at its centre, Europe's leaders have yet to face up to the magnitude of the problems facing them.

With Germany still adamantly opposed to eurobonds, the best that Europe's leaders can now manage is a souped-up bailout fund. This would see the €280bn in the EFSF that hasn't been already committed to the Greek, Irish and Portuguese bailouts used to insure peripheral eurozone bonds, with bondholders being protected against the first 20 per cent of any losses.

Unfortunately, with combined government debts of more than €2.5 trillion, even an average 10 per cent write-down of Italian and Spanish bonds would virtually wipe out the insurance fund. Who would shoulder this loss? The ECB, the EU, the individual eurozone countries?

Europe's leaders are also discussing pulling forward the €500bn permanent bailout fund that is supposed to take over from the EFSF in mid-2013 to mid-2012 and somehow combining the two. This could create a bailout fund of up to €940bn.

Unfortunately, even if a combined fund were to have the full amount at its disposal, it would have many calls on its resources. Apart from the existing national bailouts and possible future bond write-downs, it may also have to at least partially fund a European bank recapitalisation. Forget this week's EU €80bn estimate. The IMF's estimate of €100bn to €200bn is likely to be far closer to the mark.

All of which means that instead of coming up with a credible solution, Europe's leaders seem determined to persist with their discredited tactic of extend and pretend.

Sunday Indo Business

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