Editorial
October 31, 2011
The euphoria over Europe’s latest rescue package faded quickly. Now the question is whether European leaders will ever agree on measures needed to end the sovereign debt crisis, and whether they will get another chance.
After an initial bounce, markets demonstrated a lack of confidence in Europe’s resolve to protect solvent governments from the financial malaise afflicting its weakest member nations. At a bond auction Oct. 28, the euro area’s third- largest economy, Italy, had to pay investors a yield of 4.93 percent -- a euro-era high -- to take the risk of lending it 3 billion euros ($1.8 trillion) for three years.
At least European leaders got the pieces right this time. They have recognized that a credible plan must include big writedowns of sovereign debt, a recapitalization of the banking system and guarantees for newly issued government bonds -- and that all these elements are inextricably linked.
But the magnitude is all wrong. Even if put in place, the plan would reduce Greece’s debt by less than 50 percent, raise about 100 billion euros in new capital and boost the guarantee capacity of the European Financial Stability Facility to about 1 trillion euros. As Bloomberg View has pointed out, sovereign writedowns should be much steeper. And Europe needs a war chest of at least 3 trillion euros to ensure recapitalizations and cover the financing needs of euro-area governments.
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