July 23, 2011
The new European plan for the debt crisis is far more comprehensive than the previous remedies continental leaders have prescribed. By slashing interest rates and stretching out maturities on much of Greece’s debt, it cuts that beleaguered country’s overall financial burden. By urging but not forcing private banks to take a “haircut” on their Greek bond holdings, it permits a previously unthinkable default without triggering payments on billions in credit-default swaps. And by enabling the $633 billion European bailout fund to recapitalize banks, lend short-term money and buy back distressed government bonds, it offers protection against “contagion” to Spain and Italy.
The plan also includes assurances that Greece is a unique case and that there will be no further haircuts for private bondholders; the European leaders backed up that pledge by offering Ireland and Portugal softer terms on their bailout loans.
Broad as it is, does the plan go far enough? Greece would still be left with a debt at least equal to its gross domestic product — or even 25 percent greater than GDP, according to Jacob Funk Kierkegaard of the Peterson Institute of International Economics. Many analysts think that any debt-to-GDP ratio greater than 100 percent is unsustainable given Greece’s chronically low growth rates, not to mention the fact that all Eurozone countries are supposed to keep their debts at 60 percent of GDP or less.