May 26, 2024

News Analysis: Gauging the Fallout of Another Rescue

The market’s quick embrace of the latest effort to tackle Greece’s mammoth debt burden and restore confidence in the Continent’s banks reflected hope that this plan was broader and more robust than previous ones.

“It’s not a silver bullet, but it makes things manageable to some extent,” said Gilles Moec, co-head of economic research for Deutsche Bank. Though vague on details, others said, it is clearly a step in the right direction after many missteps.

But skeptics quickly emerged, saying some of the main elements of the plan may not be as good as they looked initially, starting with whether it will truly deliver as much debt relief to Greece as promised, and whether it is sufficient to buttress potentially troubled banks.

Moreover, they add, plenty of things will have to go right to ensure its success, and plenty could go wrong to derail it.

“It’s another patchwork effort,” said Richard Cookson, global chief investment officer of Citi Private Bank. “It’s trying to tide things over for the euro zone, and it has worked a bit today. But the half-life of the euphoria seems to diminish with every package that comes along.”

And David Watts, senior European strategist for CreditSights, said, “It’s certainly hard to see this as the bazooka that the market has been calling for. There are very real risks that this will prove to be just another divot in the road.”

The yield on Italy’s 10-year bond, which recently hit a high of 6 percent on concern over the country’s debt and commitment to fiscal reform, remained uncomfortably high at 5.8 percent after the agreement was announced. And the interest rates on Spanish and French bonds narrowed only slightly as well, reflecting a deeper concern that this plan would not provide a magic cure for Europe’s debt problems.

Finally, even if all the components fall into place for Greece, looming on the horizon is the debt burden of other countries, including Ireland, Portugal, Spain and especially Italy, which owes more than $2 trillion and is the world’s fourth-largest borrower after the United States, Japan and Germany. “Everything depends on Italy,” said Lüder Gerken, director of the Center for European Policy in Freiburg, Germany.

The cornerstone of the latest plan, which helped feed investor enthusiasm, is a 50 percent reduction of Greece’s government debt.

But this — the simplest part of the blueprint — comes with asterisks.

Of the 340 billion euros in Greek government debt, only about 200 billion euros — most of it owed to banks — falls under the scope of the accord, meaning the country’s total sovereign debt would be reduced by about 30 percent at best. The rest of the debt is controlled by the European Central Bank, the International Monetary Fund and other institutions that have said they would not participate in a debt restructuring.

But even a 30 percent reduction in Greece’s debt load is not assured. That is because the 50 percent write-off on the value of Greek debt, the so-called haircut that policy makers want banks and other financial institutions, to accept, is voluntary. Since Greek government bonds are trading at about 40 percent of their face value, officials from the Institute of International Finance, which represented the banks in the marathon negotiations with European leaders, said the number of participants was “very likely to be very high.”

Still, it is far from certain all those volunteers will materialize.

Antonio Garcia Pascual, Barclays Capital’s chief economist for southern Europe, said he feared that many hedge funds and nonbank investors would hold out for better terms. If enough of those investors balk, the deal could fall through.

Landon Thomas Jr. and Jack Ewing contributed reporting.

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