My quick thoughts on the Euro deal

This is a tremendously complicated subject and not all details are known. But here are some of my quick thoughts on the matter.

  • If banks “voluntarily” take a 50% haircut on Greek debt, I do not believe that a €106 billion recapitalization of the banks will be enough. I don’t think the dealmakers considered quite how big of a hit that haircut will be to struggling banks.
  • It appears that roughly half of this €106 billion is already built in to existing bailout plans for Greece, Spain, Portugal, and Dexia. However, that leaves over €50 billion in equity capital to be raised by large EU banks, which will have a hard time doing so. Although they can sell assets and cut dividends, in the end some of that equity capital may have to come from France and other national governments.

What about China?

  • The main source of potential new money is China. In theory, China could contribute capital to the EFSF and thereby help expand its scope.
  • In fact, the terms and conditions of Chinese participation are far from complete, so we should not consider it a done deal. China is likely to want an easing of trade restrictions and currency concerns that may be difficult for European leaders to accept.
Bob Pozen is a Senior Lecturer at Harvard Business School and a Senior Fellow at the Brookings Institution. His latest book, Extreme Productivity, is now available at your favorite local or online bookstore.

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