The new Euroland debt deal is yet another attempt by failing leaders to kick the can down the road. Like the leaders, it is doomed to fail.
What’s missing from the agreement and absolutely essential to prevent the spread of contagion to the Eurozone core?
1) A clear statement that the ECB will be the lender of last resort and will maintain an explicit market floor for current and future sovereign debt.
2) A recognition that growth cannot be achieved through further cutbacks in spending at a time when demand is inadequate.
3) An admission that current ECB policies are wrong and must be corrected: a cut in interest rates to zero and a higher inflation target of 4-5%.
What’s in the agreement but not anywhere near sufficient?
1) The EFSF needs at least $2 trillion dollars and an ECB backstop to be credible. The debt exposure of the Eurozone banks is on the order of $11 trillion.
2) Bank recapitalizations will likely be on the order of $500 billion or more. Tier I capital at 9% is less than the ratio at Lehman Brothers on the day it collapsed.
3) Haircuts need to be much larger and more extensive. The Greeks have no capacity to pay back the debt at the new level, in 2020 or 2030; 80% is the minimum haircut needed, and 100% is frankly the only way Greece ever recovers. The Irish, Portuguese, and Spanish need writedowns of 20-40%. The French and Italians need an explicit ECB guarantee and market floor behind their debt.
So, this deal puts off the day of reckoning by at most another month or two. Next year may see new leaders in France and Germany, who certainly can’t be any worse than the ineffectual liars they have now. Without further stimulus and the end of crippling austerity, a double dip is likely.
Gorilla says: “And so the Euro continues its fall to earth, and a crash landing is still the most likely outcome!”