27 Oct 2011
Comment: Darren Williams, European Economist, Global Economic Research at AllianceBernstein
“The agreement reached by euro area governments last night provides for a 50% discount on the nominal value of Greek government debt held by private investors (with a view to reducing the Greek government debt to 120% of GDP by the end of the decade). The EU/IMF will contribute an additional E130bn, of which E100bn will be a new loan programme that should be in place by the end of the year. There are no details on any of this but it looks very much like an extension of the July 21 agreement - in other words it is more about taking Greece out of the market for the remainder of the decade than restoring debt sustainability. Overnight, the IMF also approved the next tranche of funding under the existing Greek loan programme.
“Taken at face value, these two developments should lessen the risk of a disorderly default but there are many unanswered questions—including the details of the package, likely participation rates, what is being demanded of Greece and whether or not it can deliver. Last night's agreement also places a big focus on Italy with European governments welcoming the various commitments made in Italy in recent days (the raising of the retirement age, labour market reform etc). However, these are still promises and it is clear that Italy will now be subjected to enhanced surveillance.
“For Greece, meanwhile, it looks as if there will now be a permanent troika presence in Athens to try to lessen implementation risk. More broadly, the summit conclusions call for a significant enhancement of fiscal surveillance and there is a commitment to strengthen the economic union to make it "commensurate" with the monetary union. An interim report on this is due in December which may envisage limited Treaty change.
“In terms of an overall view on last night's summit, much depends on your perspective. If anyone was still expecting a comprehensive package that would bring the crisis to a quick conclusion, then they are likely to have been disappointed. But expectations had been managed significantly lower in the run-up to the summit so nobody could realistically have been expecting that. Alternatively, if you view this as the latest in a series of incremental steps that will eventually bring the crisis to a conclusion then it can probably be viewed as being broadly positive. For the moment, the latter view—together with the lower likelihood of a messy default in Greece—seems to be prevailing. But much of what was agreed last night still needs to be fleshed out and it is unlikely to be plain sailing from here."
“The agreement reached by euro area governments last night provides for a 50% discount on the nominal value of Greek government debt held by private investors (with a view to reducing the Greek government debt to 120% of GDP by the end of the decade). The EU/IMF will contribute an additional E130bn, of which E100bn will be a new loan programme that should be in place by the end of the year. There are no details on any of this but it looks very much like an extension of the July 21 agreement - in other words it is more about taking Greece out of the market for the remainder of the decade than restoring debt sustainability. Overnight, the IMF also approved the next tranche of funding under the existing Greek loan programme.
“Taken at face value, these two developments should lessen the risk of a disorderly default but there are many unanswered questions—including the details of the package, likely participation rates, what is being demanded of Greece and whether or not it can deliver. Last night's agreement also places a big focus on Italy with European governments welcoming the various commitments made in Italy in recent days (the raising of the retirement age, labour market reform etc). However, these are still promises and it is clear that Italy will now be subjected to enhanced surveillance.
“For Greece, meanwhile, it looks as if there will now be a permanent troika presence in Athens to try to lessen implementation risk. More broadly, the summit conclusions call for a significant enhancement of fiscal surveillance and there is a commitment to strengthen the economic union to make it "commensurate" with the monetary union. An interim report on this is due in December which may envisage limited Treaty change.
“In terms of an overall view on last night's summit, much depends on your perspective. If anyone was still expecting a comprehensive package that would bring the crisis to a quick conclusion, then they are likely to have been disappointed. But expectations had been managed significantly lower in the run-up to the summit so nobody could realistically have been expecting that. Alternatively, if you view this as the latest in a series of incremental steps that will eventually bring the crisis to a conclusion then it can probably be viewed as being broadly positive. For the moment, the latter view—together with the lower likelihood of a messy default in Greece—seems to be prevailing. But much of what was agreed last night still needs to be fleshed out and it is unlikely to be plain sailing from here."
