The Banking and Strategy Initiative

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European Sovereign Debt Crisis: Slashing Greek Debt

The EZ summit finally had a few results with Germany taking the expansion of EFSF to a German vote and Greek investors/banks being asked to absorb a 50% haircut on the November rollover as per early post Diwali reports. As we head into the winding down of 2011, wind down of GReek debt looks increasingly nlikely as the GDP Deb raio even after the haircut may keep ballooning so that by end of 2012 we have a big fat failed Eurozone economy after a Greek collapse. GDP will likely be down by 20% over the next 12 months

According to a recent Vicneto Albano analysis Greece would need upwards of $300 bln to be fully fun


Image by Getty Images via @daylife

Investments from China in Itaian and other Euro debt may no be substantial its commitments to date a meagre $15 bln and even if it doubles this year it would be a minor contribution. Banks , in the meantime, waiting for governments to bail them out have adeadline of June 2012 to up Capital by $150 bln to $300 bln Europeans would figurre less on the global trade arena in 2012 as Exports and Imports (due to domestic recession) both shrink from the so called DEveloped economies , esp GIPSIs shrinking GDP between 10-25%. Italian debt keeps trading at 600 bp over the German Bunds, with the Bunds also likely to face pressure as Germany struggles with the fiscal charge of funding everyone else The Italian Government is likely to fail in the next few weeks as Italy falls short in austerity measures or meet its debt obligations and Berloscuni struggles with a wafer thin mandate Italy has gained agreement within the EU wiih a balanced budget proposal targeting 2013

At the summit

Nicolas Sarkozy speaking at the congress of hi...

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  • The 27 EU leaders agreed a statement as per a leaked draft, fleshing out some headline details of how the bank recapitalisation will work
  • Silvio Berlusconi’s letter to his fellow eurozone leaders included a commitment to raise the Italian retirement age to 67
  • Nicolas Sarkozy will call his Chinese counterpart tomorrow in what seems to be part of efforts to win Chinese investment for a fund to buy eurozone debt
US Markets remained connected with their European Cousins at the hip as each development at the summit brought its cheers and jeers at NYSE yesterday
The EFSF has been updated to a firepower of $1 Tln but it is not clear how the French and German options have been prioritised with a try being made to rope in China as a sponsor of the investment vehicle (one of many)

The ramped-up EFSF may be used for credit enhancement for sovereign bonds or for setting up special-purpose vehicles to finance operations, or both, the statement said.

Reports before the end of the summit suggested that China would be approached to participate in any such investment vehicle.

A bailout fund with more firepower is seen as crucial in ensuring that the debt crisis doesn’t engulf Spain and Italy.

Van Rompuy said Thursday that the expansion plan for the EFSF should provide “a sufficient firewall against contagion.”

More fiscal consolidation will also be needed in Europe, Van Rompuy said.

“In this context, the euro summit welcomes the clear commitment of Italy to achieve these objectives and to abide by the timetable it set itself,” he said.

Van Rompuy said that the summit members commended Italy’s commitment to achieve a balanced budget by 2013, and made special reference to a plan by the country to increase the retirement age for its citizens to 67 by 2026.

Bank recapitalization

Before the summit ended, European officials had already announced that the region’s banks will be required to maintain core Tier 1 capital ratios of at least 9% by the end of June.

Around €106 billion in capital will be needed to reach this target, according to the European Banking Authority (EBA). Greek banks will need to raise €30 billion, according to the EBA. Read more about bank capital levels.

A key point of contention leading up to Wednesday’s summit had been the EFSF’s role in the fight to contain the crisis.




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