• 19 OCT 2011
The window of opportunity for stabilising, or even saving, the eurozone is closing quickly. As EU leaders gear up for a series of key meetings this week, Open Europe has published a new briefing looking at the short-term options available to the eurozone for tackling the most immediate crisis.
Open Europe argues that Greece should default on 60% of its debt through a managed restructuring, and that the planned second Greek bailout should be scrapped altogether, replaced by a limited transition fund designed to control the default. This would radically reduce the burden on taxpayers. Portugal should simultaneously take a 25% write-down on its debt.
Alarmingly, however, Open Europe estimates that 65 banks across the EU would fail serious stress tests, falling below an 8% tier one capital ratio, meaning they require a substantial recapitalisation. To withstand a Greek and Portuguese default, combined with marking Irish, Italian and Spanish debt to market prices, the EU banking system would need to be recapitalised by between €260bn and €372bn. The briefing sets out a three-pronged strategy for how this can be achieved, including a role for the eurozone bailout fund, the EFSF, but with strong conditionality attached.
However, using the EFSF to insure a percentage of Spanish and Italian debt against default – a proposal which is currently being discussed – would merely create a new set of unfunded liabilities, which markets are likely to question sooner or later.
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