So what happened on Wednesday?As part of the latest strategy to resolve the crisis caused by Europe's debt-burdened countries, banks and insurers are set to take a 50 per cent write-down on their holdings of Greek sovereign debt. The write-down is part of a three-pronged approach to resolve the European debt crisis, along with a recapitalisation of Europe's banks by about €106 billion and a boosting of the euro zone's bailout fund, the European Financial Stability Facility (EFSF), to about €1 trillion.
Sounds good. Maybe we should all move to Greece, then Not so fast. Greece may have wiped out about €100 billion of its debt, but it will pay a price for doing so. It has already been subjected to austerity measures as part of its bailout package, but these are likely to get tougher now. In order to rein in Greece’s still-huge debt mountain, there may be more cutbacks in social welfare, education and health, and increases in taxation. And fiscal sovereignty will remain out of Greece’s grasp for some years, at least until its bailout programme ends, in 2021.
And when it does eventually manage to fund itself again in the markets, it will have to pay a premium: after all, who will want to lend to a country that has defaulted?This will keep the pressure on the country's coffers, inhibiting spending and growth and keeping taxes high. Greece's international reputation has also been tainted, and, as last week's violent riots (above) showed, Greeks are not taking kindly to recent measures.
Okay, so a move to Greece is out, but should Ireland do something similar?With another austerity budget on the way in December, following in Greece's footsteps by slashing our debt would reduce our budget deficit, thereby easing the way for softer budgetary measures.
But Taoiseach Enda Kenny has expressed his vehement opposition to any repudiation of our bailout deal, arguing that this would close international funding to Ireland (thus requiring much harsher measures in the budget) and increase borrowing costs in the long run. It would also damage our financial reputation and throw into question the banks’ funding lifeline from the European Central Bank, as well as putting our relationships with multinationals at risk.
So what impact will the Greek deal have on Ireland?Minister for Finance Michael Noonan has suggested that it will facilitate a return to the markets for Ireland. But this remains to be seen: international investors might argue that the Greek write-down has damaged investors' perception of European government debt. Also, in future, the price of a default in a euro-zone country is likely to be the much closer fiscal involvement of the EU. Wednesday's agreement outlined efforts to "strengthen surveillance of member states' economic and fiscal policies".
Well, at least the deal has saved the euro, right?While it may have caused a welcome market bounce, it hasn't saved the euro; rather, it has bought EU leaders more time. The deal is perceived to be short on detail, and it is unclear whether banks will accept the write-down voluntarily. In addition, whether the default has done enough to reduce Greece's debt burden is not yet known.
So what's next?EU leaders will work on the detail behind the headlines and will seek outside investment in the EFSF from countries such as China, a move that may have a political cost.
