by Richard Barley & Simon Nixon
Wall Street Journal
July 22, 2011
European leaders have finally taken a big step toward addressing the sovereign-debt crisis, but vulnerabilities remain. The deal rectifies many of the problems with the current euro-zone bailout mechanisms. But the determination to get bondholders to share the burden in Greece in exchange for €109 billion ($155 billion) of new official bailout funds means the risk of continued contagion remains.
The key decisions concern changes to existing bailout packages. The interest rate on loans from the European Financial Stability Facility will be cut to 3.5% from the current 6%, and maturities extended to at least 15 years. That will make a big difference to debt sustainability in Ireland and Portugal, reducing the risk they end up in a similar position to Greece's. The deal also allows the facility to fund bank recapitalizations, including for countries that aren't under bailout programs. That should reduce market fears about the cost of bank bailouts for Spain.
In effect, the facility becomes a joint euro-zone bond issuer and TARP rolled into one. That is a blow for Germany, which has opposed moves toward greater fiscal unity. Meanwhile, to ensure the necessary oversight to go with the new funding, euro-zone leaders appear committed to agreeing to the so-called six-pack reforms, effectively giving the European Commission new powers over national budgets. This is a major step toward political union that France in particular had resisted.
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