CHAPTER 49 Greek Bailout Mark II: It’s a Default1

The European debt crisis has evolved rather quickly since I wrote Chapter 48, “Greece Is Bankrupt.” European leadership was clearly in denial. The crisis has lurched from one “scare” to another. First, it was Greece, then Ireland, then Portugal, and then back to Greece. On each occasion, European politicians muddled through, dithering to buy time with half-baked solutions: more kicking the can down the road. By last week, predictably, the crisis came home to roost. Financial markets in desperation turned on Italy, the eurozone’s third largest economy, with the biggest sovereign debt market in Europe. It has €1.9 trillion of sovereign debt outstanding (120 percent of its GDP), three times as much as Greece, Ireland, and Portugal combined. The situation has become just too serious, if contagion was allowed to fully play out. It was a reality check, a time to act as it threatened both European integration and the global recovery. So, on July 21, an emergency summit of European leaders of the 17-nation euro-currency area agreed to a second Greek bailout (Mark II), comprising two key elements: (1) the debt exchange (holders of €135 billion in Greek debt maturing up to 2020 will voluntarily accept new bonds of up to 15–30 years); and (2) new loans of €109 billion (through its bailout fund and the IMF). Overall, Greek debt would fall by €26 billion from its total outstanding of €350 billion. No big deal, really.

Contagion: Italy ...

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