Europe’s new debt crisis agreement: the good, the bad, the ugly

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Angela Merkel, Germany's chancellor, left, and Nicolas Sarkozy, France's president, hold a joint news conference during an emergency summit of European Union leaders at the European Council headquarters in Brussels, Belgium, on Sunday, Oct. 23, 2011 (Photo: Jock Fistick / Bloomberg via Getty Images)

Sometimes I think the euro zone debt crisis is like watching a remake of the Bill Murray classic Groundhog Day, with the screenplay written by Financial Times correspondents. I wake up and read the news coming from Europe: worries mount about a Greek default, contagion spreads across the continent, the euro zone leaders are lost in befuddled bickering, and then a new pact to fix the problems emerges, hailed as historic. Then I get up the next day to find we’re in exactly the same place we were before, with the cycle just repeating itself. Again and again. The only difference is that Groundhog Day made me laugh. The euro crisis version makes me want to cry.

So today, again, we find ourselves with yet another supposedly historic agreement, the one that will finally, really, once-and-for-all put an end the debt crisis, the most dangerous threat to global financial stability today. But is this the big one? Or will I wake up tomorrow listening to the same euro zone version of “I Got You Babe,” sung by Nicolas Sarkozy and Angela Merkel?

This latest pact, reached after all-night, hard-fought negotiations Thursday morning, is still short on details and has a long way to go before it can be called actual policy. But looking at the general outlines, I see some good aspects, some bad, and some truly ugly.

First, the good. The euro zone is finally getting real. Its leaders had been in denial that far greater and more comprehensive measures were necessary to quell the crisis, but this agreement shows they’re waking up to reality. Everyone knew Europe’s banks needed to be repaired; now, finally, we have a plan to recapitalize them. Everyone knew Greece needed a more drastic debt restructuring; now we have a bigger bailout (130 billion euros, or $180 billion) with a bigger reduction of debt. Everyone knew the euro zone’s bailout fund, the European Financial Stability Facility, or EFSF, was too small to fight contagion; now we have a deal to increase the fund’s capabilities by using it to guarantee private bondholders against losses on sovereign debt purchases. These are all important – in fact, crucial – steps to tackling the debt crisis, and Europe’s leaders should get kudos for taking them.

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But then there’s the bad: As has been the custom, the plan is ultimately no more than a politically determined collection of half-measures. With voters at home turning more and more sour on euro bailouts, the zone’s leadership has attempted to tackle the crisis with hardly any new money being put on the table. And, as the saying goes, you get what you pay for. The bank recapitalization plan calls for banks to raise 106 billion euros ($150 billion) in fresh capital. But that’s about half what private estimates say is necessary, so it’s unlikely to be a final cure for Europe’s banking woes. Nor is it clear what role European governments will play in providing that capital. On the expansion of the EFSF, the deal is aimed at giving the fund more firepower without adding any more ammunition. The actual size of the fund will remain the same; after the Greek bailout, no one is sure how much may actually be left. And as to that second bailout, Greece’s situation will improve due to the 50% haircut being imposed on private bondholders. (Yes, imposed. Let’s not kid ourselves that this debt restructuring is “voluntary.” No one “voluntarily” loses half their money.) But Greece will still be stuck with a dangerously high debt burden. The new deal will lower its government debt to GDP ratio to a still-lofty 120% — by the end of the decade. And even that estimate is based on unrealistic assumptions – that Greece can close its budget gap with its economy in free fall, or raise tens of billions in a privatization program that has yet to get off the ground. So my guess is that this deal resolves none of the major issues. The Greek debt crisis will continue; the banking crisis will continue; and Europe still hasn’t put its money where its rhetoric is.

And now the ugly. The deal includes a proposal to tap China and other cash-rich emerging markets to participate in bolstering the EFSF, possibly through the IMF. French President Sarkozy is expected to phone Chinese President Hu Jintao to woo him into the scheme. This whole idea is truly pathetic. If I were Hu, I’d be insulted. The euro zone leaders are unwilling to spend more to solve their own debt crisis, so they think the Chinese are gullible enough to put in their savings? I don’t think so. If Sarkozy called you up and asked for your paycheck to bailout Italy, would you give it to him? China is not a global ATM machine, or a charitable organization. In the end, China will invest its money as any other financier would – in ways that increase its return and preserve its wealth. Perhaps the Chinese can be bribed into cooperating – a notion has been floating about that Europe would promise Beijing more voting rights at the IMF. But even if China throws Europe a bone to boost its political influence in the region (or to gloat that the Europeans have come begging), the euro zone needs hundreds of billions of dollars, perhaps even trillions. They’re not getting that from China.

So in the end, this historic agreement will likely get dumped in the dustbin of history like all of the other historic agreements. So the same cycle will repeat itself again. We’ll probably be talking about a new grand agreement to halt the debt crisis by early next year. I guess it could be worse. I could be the groundhog.

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