June 30, 2011
Immediate worries about a Greek debt default were allayed on June 29th, with the passage of a first vote in the Greek parliament on an austerity plan. Not before fear had spread well beyond the Aegean. The interest rates demanded by investors to hold Spanish and Italian government debt rose to their highest levels in seven months on June 27th, before slipping back. On June 29th America’s Federal Reserve extended a promise to provide dollars to other major central banks.
The pressure to put together a second bail-out package for Greece remains intense. A proposal from the French banking sector this week on rolling over privately held Greek debt is supposed to clear the way. Not all the details are clear but the plan seems to do too little to help Greece, and too much to help the banks.
The proposal is intended to achieve two inconsistent objectives. The first is to ensure that private creditors contribute to a Greek bail-out, to satisfy German demands that taxpayers should not have to bear all the burden of another euro-zone rescue. The second is to ensure that participation in the plan is seen as voluntary by the ratings agencies, thereby avoiding a declaration of default.
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