by Alen Mattich
Wall Street Journal
October 27, 2011
Equity markets are soaring on relief that European politicians haven’t lost the ability to make fudge.
By satisfying investors’ collective sweet tooth, Europe’s politicians have made the ADHD markets happy. But will this grand pact finally solve Europe’s problems or does it just boil down to a guarantee of a line-up of yet more emergency summits?
I think the latter. Even assuming that the details are hammered out on the grand proposals without the whole rescue unraveling–that banks agree to their voluntary haircuts, that the EFSF really is effectively leveraged to a trillion usable euros, that the bank recapitalization program is sufficient–the euro zone’s deeper fundamental problems haven’t been resolved. And these will keep causing problems in the months and years to come.
Although estimates vary, it seems that a 50% private-sector loss on Greek bonds will only reduce the country’s debt load to around 120%. While that’s a sight better than the IMF’s recent projection of 190% of GDP for 2012, it’s worth remembering the Greek debt load totaled little more than 110% of GDP in 2008.
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