The Euro-fix, continued

After months of hand-wringing and haranguing, European leaders have finally agreed on another plan to save Greece from its debt crisis. Sketchy and marginally sufficient at best, it’s nevertheless an improvement over last year’s bailout, which kept Greece afloat but didn’t stop its debts from mounting. The success of the new plan ultimately depends on the economies of Greece and the rest of Europe showing more signs of life — a tall order at a time of spending cuts and high unemployment.

If there’s going to be any hope of avoiding a series of defaults in southern Europe and the damage that would inflict on the global economy, the lenders who helped Greece sink too deeply into debt will have to take a considerable loss on their investment. The plan agreed to Thursday calls for banks and other non-governmental lenders to voluntarily write off 50% of the Greek debt they hold. That’s more than fair, given that the markets value Greek debt at about 40% of its face value. But because it doesn’t apply to the International Monetary Fund and the other public lenders that hold two-fifths of Greece’s debt, the write-downs will still leave the country with a perilously large debt load.

Much of the private debt is held by banks in Greece, Germany and France, whose strength will be tested by the 50% haircut. A second portion of the plan calls for banks in the Eurozone to hold more reserves to gird themselves against the losses to come. It’s important to head off a run on European banks, but raising capital standards is a tricky business. The more money banks have to set aside, the tighter credit becomes, making it harder for businesses and economies to grow.

Bank lending is particularly important to European economies because businesses there rely much more heavily on it than their U.S. counterparts do. According to a report by the consulting firm Stratfor, roughly $8 of every $10 in private credit in Europe comes from banks, compared with a little more than $3 out of $10 in the United States. So if the deal depresses lending in Europe, it only increases the chances of another recession and cascading defaults.

The third piece of the plan calls for a much larger European “stabilization” fund to support the bonds that Greece, Italy, Spain and other debt-laden countries issue. Where that money will come from remains a bit of a mystery; European leaders talked about borrowing or attracting investments from countries flush with cash, such as China. Persuading investors to take a risk on the fund would be a good thing; borrowing the money, on the other hand, would only magnify the potential losses if one of the supported countries can’t pay its debts.


Clearly, a lot can go wrong with this rescue. Perhaps the best that can be said of the deal is that it buys time for Greece and nearby nations as they struggle to close their budget gaps in the face of strong public resistance. Nothing would ease that struggle as much as vigorous economic growth in the Eurozone, but the deal offers no help on that front. Instead, it lines up more potential hurdles.