Euro zone nears flawed crisis strategy

Paul Taylor, Reuters, 24.10.2011

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First the good news: European leaders are nearing a strategy to counter the euro zone's sovereign debt crisis. Now, the less good news: it has some apparent flaws and may fall apart.

Under an emerging deal likely to be struck on Wednesday, Greece's debt will be reduced, European banks will be recapitalised, the euro zone's rescue fund will scaled up to provide partial insurance in sovereign bond markets, and Italy will be pressured into getting serious about economic reform. [...]

Analysts say the insurance scheme could create a two-tier bond market with old bonds worth less than new ones, and said the overall plan was still insufficient to tackle the crisis.

It may also fail to create sufficient demand for the more than 600 billion euros which Italy alone needs to issue in the next three years to refinance its maturing debt.

"Will guarantees of 20-25 per cent be sufficient to entice investors to buy the sovereign bonds of the countries concerned, given that the Greek example already shows that a much higher 'haircut' is possible in the event of a sovereign default?" asked Janis Emmanouilidis, senior policy analyst at the European Policy Centre think-tank.

Governments are trying to convince banks and insurers this week to accept a "voluntary" write-down of 50-60 percent on their Greek bond holdings, while insisting that Greece is a unique case, not a precedent.

"Will the leverage effect be large enough to persuade markets that the EFSF is able to offer a liquidity net to all eurozone countries in danger?" Emmanouilidis said. [...]

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