September 29, 2011
The German parliament’s acceptance of a refurbished eurozone rescue fund makes it very likely that the package of measures agreed by the currency area’s leaders in July will be implemented. But the game has moved on, and it is a good sign that the main decision-makers are discussing what more is needed.
The answer is two things above all: to leverage the European financial stability facility up by enough weight classes to impress markets; and to exact deeper private sector sacrifices in the planned exchange offers of Greek government debt. While the former is controversial, sentiment seems to be tilting in its favour. A bigger battle is about to erupt over the latter.
The idea of “private sector involvement” in the second Greek rescue has been riddled with a contradiction. Making private owners of the bonds in question help to make things easier for Greece is incompatible with averting a sovereign default – if “default” means anything but honouring original terms on time and in full, these are incompatible. But the goal should be another: to ease Greece’s burden while making investors no worse off in real economic terms than they are now. This is possible: the market discount on Greek bonds reveals that investors know their prospects are awful.