The agreement reached on October 26, which will supposedly increase the size of the European Financial Stability Facility (EFSF) to EUR1 trillion, apply a 50% haircut to Greek debt and increase bank capital by approximately EUR110 billion is necessary – to the extent that it removes the immediate threat of systemic banking collapse. But it is not yet sufficient to address the structural underpinnings of the current crisis.
Aside from the evident lack of specific detail, particularly with respect to the expansion of the EFSF, and the repetitive rhetoric concerning commitment to do all that is necessary, which we have seen in successive summit statements, the proposals will not deliver the primary surpluses necessary to stabilise government debt ratios.
Neither will they lessen the leverage of the banking system to more sustainable levels or encourage private demand to offset the continued commitment to fiscal austerity and will have an immaterial impact on Greek indebtedness.
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