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European Sovereign Debt Crisis: The Fiscal Compact, the Greek Default Deal and the new firewall

2012 Hellenic Summit Games


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Though the firewall is a misnomer the EUR 650 bln facility that will run concurrent to the existing EFSF of EUR 350 bln and continue post 2013 when EFSF expires has given the Euro breathing space to consider the deleterious impact of the -0.5% deficit limit imposed in the new Fiscal pact signed at the 17th summit of the European nations since January 2010 25 nations agreed to the new Fiscal pact including the eight non Euro economies except UK and the Czech Republic which needs to study it for local approval. The EU25 will now live a not so charmed life, having to rewrite developmental projects and battle unemployment without welfare spending.

ECB and the Financial Markets

Mario Draghi welcomed the new Fiscal Pact as a first step towards the ultimate Fiscal union and yields dropped across Europe on the news. The Euro as expected continues to trade 1.31 even as the new promised EUR 1 – 1.5 Tln 3 yr lending window for banks is around the corner to recreate the liquidity it provided in  end November

That everyone is now ready for the Credit event, no less the CDS protection writers who have already paid into the buyers with margins up to 90% on Greek debt and 40% on Portugese debt, the remaining negotiations continue to stretch on despite the predictable outcomes on the compact and no other linkages for investors except to save EUR 25 on every EUR 100 of debt in the deal with the best NPV they can get. That the fight is no longer for EUR 50 or EUR 60 on the debt but much less should have speeded the negotiations to a fruitful conclusion even as th EU summit chose all the predictable clauses, stayed away from Budget Commmissioners for Greece or others and allowed the European Court of Justice to be the authority to impose fines on erring economies int he new Fiscal Pact. The $1 Tln promised in the new ESM also came through without any nudges or shouting from Davos, IMF or the German politic.

100,000 peaceful anti-austerity protesters in ...

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More pain for Greece

Greece additionally needs to promise stricter private sector wages which will impact another 1.5% contraction in the GDP for the EUR 130 bln it needs approval for even as analysts wake up to how much divestment will really be done from the promised PSE
Euros in Greece in the next 2-5 years.  Greece also needs to find another EUR 2 bln in spending cuts for the overspending in 2011 to bring it back on target.

All the above measures cannot ignore the Eurozone’s teething troubles with unemployment. 23 mln jobless people, at a 23% rate in Spain and 19% unemployment in Greece, deepen the North-South divide even as at least EUR 80 bln in development finance for small and mid cap European companies is yet unspent. The unemployment rate is as low as 4.1% and 4.9% in Austria and Holland, the other AAA economies even as Germany continues to grow its GDP and unemployment is a t a 10 year low. onthe other hand these economies have as low as 12 mln in the age groups (18)25-64 or eligible to work populations

The Unemployment pivot for Economic think

Developed Economies from New zealand and Canada to the US continue to battle with high unemployment , higher in the youth below 35 and that is likely to change the relevant economic solistices from population to employment in this half of the worlsd, Europe presumably at the center of the protectionist vortex it takes to rediscover Economic equations that work in all the mindless ctdown of growth and hopefully some of the mountains of debt. Eurozone unemployment is a record 10.4% according to today’s data release

Lack of Welfare Euros for employment programmes int he new deficit discipline is likely ot be felt during this period in that traditional employment measures like nation renewal spending are out of bounds for the 17 Euro countries even as the Czech reconsider joining the currency union

Meanwhile Super Mario has mixed required austerity measures with EUR 50 bln in aid from the UK for develpmental spending in Italy even as Italian and Spanish banks celebrated the three year LTRO with a strong response to auctions, Portugal relegated to a real default status “likely” by the markets as it finds difficulties in stayin gwithin the budget and tries to tone down expectations for a balanced budget in 2013




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2 comments on “European Sovereign Debt Crisis: The Fiscal Compact, the Greek Default Deal and the new firewall

  1. Pingback: European Sovereign Debt crisis: Greek agreement finally reached, announced | The Banking and Strategy Initiative

  2. Pingback: US Economy: Chicago Index , Greek Euros 130 bln printed and posted | The Banking and Strategy Initiative

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