EU leaders have come up with a new plan to rescue Greece from its debt crisis and, by extension, the rest of the euro zone. At their summit in Brussels on October 26, they decided to write off half of Greece's debt, providing the country with a fresh bailout so that the rest of its debt can be restructured. They also agreed to double the EU rescue fund. The agreements reached may pull the euro zone back from the brink, but, as analysts say, the declared intentions have yet to be substantiated with a concrete plan of action.
Verbal intervention
The summit's key agreement is to write off 50% of Greece's debt. Greek Prime Minister George Papandreou has said that this decision marks the beginning of a new era for his country. According to European Union President Herman Van Rompuy, Greece could receive up to 100 billion euros from the EU and the International Monetary Fund as part of a second Greek rescue package.
It was also decided to increase the European Financial Stability Fund (EFSF) to 1 trillion euros, up from the current 440 billion. Also, this rescue fund will probably be entitled to insure Eurobond buyers against losses.
"These decisions are adequate at least in the short term," says Sergei Afontsev, a department head at the Russian Institute of World Economics and International Relations. "It's clear there's still a long way to go before the Greek issue is solved, but a very important step toward that end has been taken."
A number of experts caution against excessive optimism over the summit's decisions, though. They emphasize that top EU officials have just outlined possible solutions without suggesting any concrete strategies to implement them and without putting a timeframe on their rescue plan. "Details will have to be elaborated in the weeks ahead," says Kirill Tremasov, head of the analytical department at the Bank of Moscow. "We cannot rule out the possibility of a deadlock, in which case the agreements reached would have to be revisited."
Judging from the amount of verbal hedging, such as "will" and "could," in their latest agreements on the Greek debt, EU officials are not 100% sure the rescue fund will, indeed, be increased and that Greece will get its bailout package.
"This can be described as verbal intervention, which has been used on a regular basis since the crisis broke out in 2008," points out Yelena Matrosova, director of the Macroeconomic Studies Center at the Russian branch of the BDO consulting and audit company. "It exerts considerable influence on market trends."
Indeed, some overly optimistic statements have already led to a surge of stock and oil prices on world markets. The French CAC 40 index rose by more than 4% by midday Thursday, Germany's DAX 30 went up 4.21%, and the British FTSE 100 surged 2.33%.
As for crude oil, WTI December contracts rose by $1.7 on the New York Mercantile Exchange, to $91.89 a barrel, while Brent reached the $110.02 mark, up $1.11 on Wednesday's close.
Delivering on promises
"Verbal intervention" has had some positive effects, but this may be undermined by costly anti-crisis measures. Thus, for example, the decision to write off half of the Greek debt may cause serious problems in the euro zone's financial sector. "Greece's [debt] problem is a problem of its creditor banks and their clients - corporations and private individuals who keep their deposits there," Matrosova explains. "As soon as bankers are approached with a request to write off Greece's debts, doubts will arise about the reliability of a bank at hand. Private individuals and companies will then begin to withdraw money from those banks that have more Greek debt on their balance than others."
Some experts, however, see this scenario as unlikely. "Markets have already played out this theme," Afontsev explains. "The writing-off margin was between 40% and 60% initially. That the final figure has been set right in the middle is in keeping with market expectations."
Tremasov argues that the debt crisis has been ongoing for eighteen months now, so the banks have had enough time to find a way of cushioning themselves against possible future blows. "The problem has spread thin over the banking sector, and the debt is no longer concentrated in some specific banks, French, Italian, or others," he says. "Part of the debt has been bought out by the European Central Bank, and now the ECB has 170 million euros worth of toxic bonds on its balance." But if the write-off plan had been announced a year earlier, the consequences would have been harsh for everyone."
China omnipresent
China is apparently seeking to profit from Greece's debt crisis. Chinese officials have now offered a helping hand to the European Union, or rather a deal. They have proposed contributing to the EFSF, but not without compensation. "China never acts without any self-interest," Afontsev says. "Earlier it suggested buying indebted countries' bonds in exchange for concessions in trade investments. There is no doubt it will set similar terms for its new proposal to contribute to the EFSF."
This proposal from China's leadership is entirely consistent with the course the country has been pursuing over the last decade. "They have a global trend toward Chinese domination, not just on the markets but in bodies that determine economic policies," Matrosova says. "If it gets involved in the EFSF, China will be able to influence the European Union's monetary policies."
According to some analysts, the West will not let this happen. "I'm absolutely sure that EU officials will reject the proposed involvement," Afontsev says. "Concessions to China may prove painful to European companies, which will then face fiercer competition. Also, this will deal a serious blow to the image of the EU and its leaders. "
EFSF officials' initial response suggests, however, that they are interested in cooperating with China. Klaus Regling, who heads the fund, is going later this week to Beijing, where he is expected to discuss the possibility of Chinese participation in financing the EU rescue fund.
The situation remains uncertain, though. Collapse has been averted for the time being, but no systemic problems have been solved yet. The new EU bailout may help Greece escape a default on its sovereign debt. But what next?
Experts have said repeatedly that the Greek economy has no growth areas, especially when the euro is strong. "The economies of Greece and other peripheral countries would be better off with a weaker national currency," Tremasov says. "If they lose the competition to major euro zone economies, what do those countries need the single currency for, in the first place?" Tremasov is sure that if, despite all the efforts made, the negative trend fails to be reversed and the problem economies do not get back on track and start growing, the option of withdrawing from the euro zone will loom even larger.
The views expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
