After months of inaction, the Eurogroup is speaking collectively at last. Yesterday, European leaders met to finalize a draft agreement that signifies a turn in the slow procession of an elephantine European political system. Until now, they have been unable to agree on a solution that would untangle Greece´s mess and related implications for peripheral countries.
Greece is technically broken already, so the seriousness of its problem and the fear that the ratings agencies will call "default" if a solution so much as resembles a non-payment have at last united various disparate ideas. And now Germany, France and the BCE are on the same path. It was necessary to make some sort of decision yesterday, so a pragmatic resolution was reached.
The small print is missing from the European leaders´ draft, and many fringe issues will be fleshed out in the future. For now the markets have accepted the draft. It tarried for an unbearably long time. In Spain´s case, the news preceded a relaxation of the risk premium and interest rates on debt by 300 points and 6%, respectively. And the Ibex fought its way back to 10,000 points after rising 7% during trading sessions.
The pact confirms that Merkel has proved herself to European leaders. Greece will default, but people are ignoring when and how much. The BCE is giving in to feel in their own skin the Greek default. For now, as countries restructure loan conditions for countries with aid packages have had their repayment interest rates lowered from 3.8% to 3.5%, equivalent to what French bonds are yielding right now. Further, the repayment term will be extended from 7.5 to 15 years. This would ensure that recovering countries can grow sustainably as they focus on ways to build their economy rather than allocate all their resources to getting out of debt. Greece´s new aid program would be qualified as a "Marshall plan," but the exact quantities of the aid are uncertain.
The Eurogroup´s strategy contains positive aspects, but there are deficiencies as well. The good parts are flexibilities related to the current bailout fund such that the European Fund of Financial Stability could recapitalize lenders through credits to European governments, including countries that have not been given aid. The spirit of this measure is to avoid spreading fear of widespread and systematic economic crisis. This frees up credit for countries on the brink of collapse ? such as Spain and Italy?and signifies an unrealistic risk for a EU that hasn´t been terribly diligent in working their way out of collapses much less severe than those in Portugal, Ireland and Greece.
The leaders did not talk about increasing the size of the recovery fund. And that is something that arouses some anxiety, especially if it were necessary to bail out another country. If indeed palliative credit can be a bandage for avoiding this end, then the markets, who are the risk valuation mavens, adding more money to the fund would not markedly affect the risk level of that situation. And the additional funds would remain small. Also, the agreement doesn´t say anything about the bank´s participation. Once again the EU has created a proposal that describes "what" but doesn´t get around to explaining "how."
Underlying the agreement and recovery fund is the issue that the Eurogroup was playing on more than market risk or a chain reaction among peripheral countries. What´s called into question in the entire debt crisis is the integrity and authority of the euro. Yesterday there was a positive yet insufficient turn in the course of events. In any case, this will be another before-and-after tale in the EU.
