The Agreement reached yesterday by Europe’s political and financial elites is meant to tackle, once and for all, the Greek debt problem. Just as in May 2010 the idea was that intra-eurozone contagion could be prevented by ringfencing Greece (recall the first Greek bailout, the creation of the European Financial Stability Facility, the EFSF, and the ‘radical’ step of having the ECB purchase peripheral bonds in the secondary markets), so too at present our great and good leaders have deemed it necessary to have a second stab at the ‘ringfencing’ problem, given the abject failure of their first attempt fourteen months ago.

Undoubtedly, there are elements in the new Agreement that have merit. For example, turning the EFSF into a TARP-like pan-European fund for recapitalising the banks (and not only those of the ‘fallen’ member states) is a good idea that I have proposed some time ago (and whose practical value will be judged, in practice, by the degree to which banks are forced to take capital from the EFSF in exchange for shares). Additionally, lending Greece at 3.5% and for thirty years seems positively civilised, in comparison to the exorbitant rates of the first bailout (and the laughable four year repayment period). Lastly, a haircut of around 20%, which is what is effectively touted now, for bonds expiring up to 2019, would have probably sufficed in early 2010. Read the rest of this entry »