The Global Economy in Turbulent Times

CHAPTER 13 Gloomy Outlook Takes Its Toll, 2011–2012¹

With every passing day, the shelf-life of the eurozone’s rescue package is getting shorter. On July 21, eurozone leaders agreed to a second Greek bailout (details in Chapter 49, “Greek Bailout Mark II: It’s a Default”). European parliaments have yet to complete ratification to expand the €440 billion bailout fund (European Financial Stability Facility—EFSF). Already, talk has shifted to expanding the EFSF in the light of escalation of the crisis. Frankly, the fund is just not large enough to halt the contagion. It’s a matter of market confidence really—the larger, the better. About one-half of the fund is already committed or utilized—with more demands coming on. Greece will miss the deficit targets for this year and next despite austerity, showing the drastic steps taken to avert bankruptcy are not enough. The crisis is boiling over. Eurozone ministers have since delayed the release of €8 billion cash scheduled for October 13, threatening to revisit the deal where private bondholders may be asked to take a higher “haircut.” This has rattled markets and raised fears of an imminent messy default. Estimates are that with a 60 percent haircut (21 percent now) for private bondholders, Greek banks would suffer another €27 billion write-down, wiping out their capital. Inevitably, the fallout will have much wider repercussions and fuel turmoil for Spanish and Italian debt, not to mention Irish and Portuguese.

The Contagion

The ...