European debt package indicates determination and drive
The debt agreement is a step in the right direction. " It is clearing up a bit, but the fog has not lifted yet," says chief analyst in Danske Invest Bo Bejstrup Christensen.
The presentation of yet another crisis package from the Euro-countries late thursday contains many of the necessary measures and provides more political clarity. However, there are still many uncertain factors and loose ends. This is a statement made by chief analyst Bo Bejstrup Christensen at Danske Invest.
”It is providing more clarity. The package has shown that the Euro-countries will address the Greek debt problem, and the countries have committed themselves to supporting Greece. This means that Greece will not be pushed into a collapse and will thus avoid a national bankruptcy,” says Bo Bejstrup Christensen.
Moreover, he explains that the agreement is indicating that Germany is prepared to offer support, that Greece will implement tightening measures and reforms and that the countries are generally willing to cooperate across the eurozone. At the same time it appears that we will avoid the banking crisis that more analysts have feared would materialize.
Three primary items
The agreement contains three primary items: Greek government bonds are to be written down by 50%, banks are to be recapitalized and thus become stronger equipped to counter future financial challenges, and finally the European Financial Stability Facility(EFSF) is to be increased 4-5 times to obtain more weight.But there are still questions that need to be answered, stresses Bo Bejstrup Christensen and continues:
”There is commitment to help banks, but the details are still missing. At the same time Italy is to deliver the promised reforms, and we have not yet seen whether this is going to happen. Finally, it remains unclear what the exact shape of the EFSF will be. Here we also need to see the details,” says Bo Bejstrup Christensen.
Still uncertain
The problem is that it is uncertain whether the banks are willing to accept a 50% write-down of their Greek government bond portfolio – and if at all so - how many banks will be willing to do so. It is necessary if Greece’s debt is to be reduced to 120% of GDP by 2020, which is the ultimate target. In addition, it has not yet been clarified how the banks will raise the back-up capital of EUR 106bn which the Euro-countries are demanding in anticipation of future problems. To begin with, the banks must procure the additional funds by themselves, but the individual countries are to ensure that this not will take place by banning lending. On the other hand, banks’ long-term liquidity is to be ensured. Finally, the EFSF’s financial muscles are to be trimmed, but the precise plan is still missing.
Nevertheless, Bo Bejstrup Christensen is optimistic:
”It is important to consider the worries that we had a couple of months ago, i.e. the situation in Europe and the fears of another US recession. The past two months’ US economic data have shown that the fears of a recession have decreased. If we look at Europe, the fears were centred on a banking crisis elicited by the lack of political agreement. Subsequently, Germany and France have made it clear that they are willing to find a solution, and with the new crisis package the Euro-countries are showing drive and determination to help Greece and provide support for the banks. All factors are highly positive. But again, we need to see the details,” says Bo Bejstrup Christensen.
