Friday, July 22, 2011

A step forward for the eurozone

Financial Times
July 22, 2011

Not for the first time, the leaders of the eurozone have stepped back from the brink only after staring hard over the precipice. But this time at least they did more than just recoil reflexively from a looming disaster.

While Thursday’s summit certainly did not produce a comprehensive solution to the sovereign debt crisis, it cannot be dismissed as just another last-minute fix. The contents of the communiqué suggest an attempt to grope towards a better prescription for dealing with the crisis. If not the finished article, it is at least based on a sounder diagnosis of the eurozone’s ills.

Debt solvency, contagion and an absence of economic growth are at the heart of the crisis afflicting the eurozone. The leaders showed some willingness to tackle the first, proposing to cut the burden on the three peripheral countries in European Union/IMF programmes: Ireland, Portugal and Greece. They will benefit from lower interest rates and a substantial extension of their debt maturities.

They have also bitten the bullet on debt restructuring in the case of Greece. The decision to allow bond buybacks on the open market is particularly welcome. If, as seems to be the case, the incentive for principal reductions through debt exchange is to offer new securities enhanced with collateral, then that is a Brady bond type solution of the sort this newspaper has advocated.


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