Detail lacking in rescue plan, says Forex.com
Kathleen Brooks, research director at Forex.com, is concerned that the second bailout of Greece agreed yesterday still leaves too many unanswered questions.
“The latest breakthrough on a second bailout for Greece is enough to keep the markets happy for the next few months, but what about the details of the plan?” Brooks said.
“Positives to be drawn from the EU summit agreement include the involvement of the ECB. Without their support for partial defaults, the plan would not have worked and the markets would have panicked.
“Europe’s leaders have finally grasped the gravity of the situation and have come together in a show of unity to provide a solution. It is a very small step to fiscal sustainability for Europe’s periphery that would have been more effective 18 months’ ago. Better late than never.
“Athens will still have a debt-to-GDP ratio of more than 120%, which is unsustainable. Private sector bond holders may be asked to take an even deeper haircut in the next few years, but it’s not a given they will continue to take cuts on their holdings of Greek debt in the future.
“The strengthening of the powers of the EFSF and ESM is a welcomed development. But this has highlighted the inadequacy of the size of the EFSF. It needs to be much larger than EUR440BN to make a difference, especially since Spain’s banks are likely to need large capital injections over the coming years.
“This plan is only designed with Greece in mind – what about Ireland and Portugal? Ireland made some progress yesterday by securing a cut in the interest rate of its bailout loan, but not enough to stabilise Irish debt levels.
“The euro is likely to recover strongly in the short term but the bigger issues for the euro include France and Germany’s position on the hook for a much larger EFSF fund. Other factors to bear in mind include another round of haircuts for private sector bond holders, slowing growth and the possibility of the ECB scaling back their policy normalisation plan for the rest of this year. This could hurt the single currency in the coming months.”