“I’m positively surprised, for a change,” says Andrew Bosomworth of Pacific Investment Management. Eurozone leaders have exceeded low expectations by making more progress than expected on measures to tackle the bloc’s debt crisis.
First and foremost, the effective lending capacity of the EU’s rescue fund, the European Financial Stability Facility (EFSF), has been increased from €250bn to €440bn. Add the other EU/IMF loan facilities, and the total sum that can be lent to countries struggling to pay their debts, is €750bn. And when the EFSF expires in 2013, its successor will be able to lend up to €500bn.
Greece and Ireland, the two states that have tapped the aid facilities, have been offered easier rescue terms. Ireland is still negotiating its deal. As for Greece – in return for selling more government assets, it will pay 1% less on its 5% bail-out loan and has 7.5 rather than 4.5 years to repay the money. Moreover, the rescue funds can now buy bonds at auction from countries that have already been bailed out.
Given that many observers are worried Ireland and Greece will not be able to return to the debt markets as rapidly as their rescue programmes assume, that’s good news, says Capital Economics. But it will do nothing to lower the exorbitant interest rates Portugal is paying. Portugal, whose debt was downgraded again by credit-ratings agency Moody’s this week, still looks likely to need a bail-out. But there is now enough money in the rescue funds to cover both Spain and Portugal’s financing needs until the end of 2013.
The upshot, however, is that while this deal may buy the eurozone some time, it’s hardly a definitive solution. These measures “address only near-term liquidity concerns, rather than trickier issues over solvency”, says Simon Nixon in The Wall Street Journal. They are hardly likely to change the market’s view that “Greece’s and Ireland’s debt is unsustainable or that Portugal also will need a bail-out soon”. Fears of eventual default won’t go away.
Ultimately, your debt keeps growing “as long as your growth rate is below the interest rate you are paying”, says Nomura’s Peter Westaway. As these three countries are in recession or barely expanding, their debt piles continue to rise. So for these states, says Nomura, austerity measures designed to lower debt actually increase it as the squeeze undermines growth. With the basic problem unresolved, says Wolfgang Münchau in the FT, the EU continues to “muddle through a never-ending crisis”.