Debt crisis

A debt write-down for Greece, bank recapitalization, and leverage for the European Financial Stability Fund (EFSF) are all included in a raft of measures Europe is considering as it prepares to tackle the debt crisis. The proposals are the result of a three-day marathon of European Union talks, the likes of which Brussels had never seen before.

The measures are not only about managing sovereign debt and shoring up the financial sector. They could also decide European Union's long-term fate, which is why policymakers are under pressure to unveil something special when they present their official proposal for adoption at the next summit on Wednesday.

Michael Hüther, the head of the Cologne Institute of Economic Research, said an end to the eurozone crisis could be in sight - as long as Europe honors the suggestions put on the table on Sunday.

"Because a consensus is possible, the outcome of the summit will have a stabilizing effect on the markets," Hüther told Deutsche Welle.

Market relaxation

Michael Heise, chief economist with the Allianz group, said delegates attending the weekend summit took "a step in the right direction" and that the right combination of proposed measures will relax financial markets. "I think the prospects are good," he said.

The size of the debt write-down for Greece has not been specified, but in light of alarming new figures about Athens' financial situation, private creditors are likely to lose at least half of their investments.

That could leave some banks in need of a capital injection, possibly from the state.

The last of the proposed measures is the leveraging of the 440-billion-euro EFSF – perhaps by a factor of five. The plan would encourage private investors to buy sovereign bonds by offering them partial guarantees to remove some of the default risk.

Michael Heise said he supports the concept of leverage even though it has been criticized for being risky.

"If you look at it closely, it is a very good concept to ensure that the limited means provided by Europe's taxpayers are put to effective use," Heise said.

No place for the European Central Bank

French calls to involve the European Central Bank (ECB) in the rescue plan have been removed from the table to avoid friction with Germany and the ECB itself.

Paris had been pushing for the ECB to grant the EFSF a banking license, which would have allowed it to obtain additional funds from ECB.

Hüther, who opposes any further mixing of monetary and fiscal policies, described the proposal's withdrawal as an "important" decision.

"That would involve monetary policy in the search for a solution for fiscal policy issues," Hüther said. "So the rejection of this French idea is quite right."

Provisional solution

Although experts still have a lot of calculations to do and models to work through, Heise said he is hopeful that the three-part plan could serve as a provisional solution to the European debt crisis.

In order for it to work in the medium-term, however, some countries would need to reduce their debt levels considerably. Heise says that would require countries like Italy and Spain sticking to their ambitious austerity pledges.

"If the markets receive the signal that political decisions underscore unity in Europe's fiscal policy, I think we will see signs of relaxation throughout next year," Heise said.

If that does not occur, Europe will continue to be at the mercy of the markets, Hüthner said.

"The pressure on politicians from markets is a result of their own unreliability. They have to create a feeling of credibility," he said.

Author: Henrik Böhme / tkw
Editor: Sam Edmonds