Here’s the deal on Europe:
Ger,any won’t put up any more moneythan already committed to the Stability Fund.
But the Fund is insufficient to save the day.
France wanted to make the Fund a bank so it could borrow unlimited amounts from the European central bank t extend its clout.
but Germany (and the ECB leadership) vetoes that.
The European banks will have to take bigger haricuts on their greek debt holdings to bring those debts down to an at least arguably manageable level for Greece going forward the next decade or more (new papaer to be issued to replace the old, post-haricuts).
But taking steep haircuts (50% + instead of the previously negotiated 21% (which was being arbitraged by hedge funds with trading actually at the 50% haircut level) means that banks must be recapitalized.
Germany says that the banks themselves must first raise capital, and then their own countries should pony up to help them re-cap.
But if France does that, it could lose its triple A credit rating, which in turn would jeopardize the integrity of the Stabilization Fund itself.
Soto bring more money to the table to fix both sovereign debt problems and the bank re-cap needs, Europe will need to do two things — (1) set up a “special purpose vehicle” ) shades of Enron?) to ttreact Brazilian and Chinese investments that could be used to prop up the Stabilization Fund indirectly (a sort of synthetic Euro-zone bond issuance) and (2) swallow its pride and bring in the IMF’s deep pockets (which of course are funded in no small measure by the US taxpayer).
Do you think this might be an issue in the next Republican debate?
Of course, China and the US are big exporters to Europe, and their stacok markets have suffered because of europe’suncertainties lately, so they have a strong interest in seeing things right . And in the US at least, we learned from Lehman that “real” hazard trumps “moral” hazard.
Germany has vetos sing the