March 14, 2011
The oldest trick in the conjuror’s manual is pulling a rabbit out of a hat. That is what eurozone leaders did at the weekend, unveiling a package of measures to help each other survive the sovereign debt crisis just when investors had lowered their expectations. The package buys the troubled bloc more time (not an unworthy aim), but the legerdemain does not resolve the eurozone’s central issue: solvency.
Given the difficulty of reaching agreement in a divided bloc, and the missed opportunities up to now, the announcement represents progress. The European financial stability facility, the main vehicle for funding countries in difficulty, will have its lending capacity raised from about €250bn to €440bn, and the interest rate on new loans from the facility will be up to 1 percentage point lower. Greece will benefit, but no arrangement has been agreed for Ireland, and the package makes no nod to the difficulties facing Portugal, which will almost certainly have to turn to the EFSF for funding.