An important European step but still much to do

by Mohamed El-Erian

Financial Times
October 28, 2011

The financial markets have enthusiastically welcomed the agreements reached in Brussels on Thursday, and understandably so – not only for their immediate content but also for what they signal about how far European leaders are willing to go to finally catch up with the realities of the region’s crisis.

But the feel good factor will only last if this is followed quickly by two other important developments.

First, and most immediate, there is a long list of details that must be specified over the next few weeks to put into practice what was agreed to in Brussels. Many of these are technically very complex. Indeed, implementation may prove as tricky as the original negotiations, if not more so.

How will the reduction of Greek debt actually be executed? Will the banks that need capital be able to find sufficient private funds to meet the new prudential targets? In the event that they do not, what conditions should be attached to the financing coming from taxpayers? How will the European Financial Stability Facility be levered? How will its funds be allocated among competing claims, including between stabilising the old stock of debt and providing partial risk insurance for new issuance? And what roles will the European Central Bank and the International Monetary Fund play, as well as other countries?

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