After all the hoopla over the last week where Trichet basically said that Euro sovereign debt was money good, we find that the same people have caved and debt relief has been granted.
But I ask the question, “Has debt relief really been granted?” Yes, there have been some haircuts on some Greek bonds, and yes there is interest relief involved. But my read of this deal takes Greek Debt to GDP from an impossible 175% to an (almost) impossible 130%. So I am left wondering if this is a half loaf; one that does not get the job done. We shall see.
The Council of the European Union released a long statement on this. I ran it through Wordle. This is what you get:
The full statement(s) can be read at this Zero Hedge link. Here is the one comment that I think is the crux of the matter:
All other euro countries solemnly reaffirm their inflexible determination to honor fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole.
From this one must conclude that the ECB has put up a big fence around Greece. They are the only exception in all of Europe that will ever see debt relief as an option. There will not be a default for Ireland, Spain and Portugal (and don’t even mention Italy). I say to that: You wanna bet?
The CEU statement makes it pretty clear that the Euro folks are going to do everything they can (including direct intervention in the bond market) to stop the spread of contagion. I think they will succeed in maintaining market peace for a few months. But sometime this fall the issue of default by some Euro members will rise up again. It has to. I think the leaders in Europe are dreaming.
Note: The Greek deal will have an IMF component. A portion of that will be funded by the good old US of A. There are no details at this point but I would suggest that the US portion of this will come to $15-20 billion. In the scheme of things that is not a big deal. But in the summer of 2011 a bailout of this amount for a country that has little connection to the US is not going to be such an easy sale. I think this will happen, but that will be the end of it. The US will not take part in the next Euro bailout. And yes, the next Euro bailout will happen before year-end.