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September 25, 2011

European debt crisis

1. Greek Finance Minister Evangelos Venizelos was quoted by two newspapers as saying an orderly default with a 50 percent haircut for bondholders was one of three possible scenarios for resolving the heavily indebted euro zone nation's fiscal woes.

Signs emerged on Friday that European governments are working on recapitalising vulnerable banks, with France's top market regulator saying 15 to 20 banks needed extra capital, although no French ones "at this stage".

A statement issued after G20 talks in Washington said the 17-nation euro zone would implement "actions to increase the flexibility of the EFSF and to maximise its impact" by mid-October.

2. According to senior G20 sources, the assumption now is that the country will have to default on its debt by as much as 50% – on top of the 20% voluntary restructuring already agreed in July.

And so whereas efforts some months ago were aimed at preventing Greece defaulting, the Eurozone, and its G20 colleagues from the world's biggest economies, are instead making secret plans to build a firewall protecting European economies such as Spain and Italy from the prospect of a buyers' strike.



Here's what ministers are currently thinking: Greece is, in sovereign debt terms at least, a lost cause.

Portugal and Ireland may be salvageable – unlike Greece their austerity plans and bail-outs are yielding at least some results, albeit at the cost of some severe pain.

A collapse in confidence in the debt of Italy or Spain would be disastrous and unaffordable.

A Greek default would send an instant financial shockwave through the euro area, since so many banks – particularly in France and Germany – hold its debt.

Nonetheless, the first priority ministers have already openly agreed on is to pump more capital into their banks to ensure their balance sheets are healthy enough to withstand it when those Greek debts suddenly become worth half their previous value.

The IMF said just this week that European banks are undercapitalised to the extent of 200 billion to 300 billion euros. The assumption is that not all the money can be raised from the beleaguered private sector.

So it is hoped that the euro members could use cash from the European Financial Stability Facility (EFSF), a bailout facility worth around 440 billion euros - to help shore up these bank balance sheets.

There is talk about using some kind of leverage to increase the EFSF by five times.

3. The Guardian UK talks about five fixes for the global crisis and the odds that they will be implemented.

(1) Inject more capital into the European banking system. (200-300 billion euro) 4 in 5 odds

(2) Get an [orderly] Greek default done. Let Greece writedown 50% and have a credible plan to protect Portugal, Ireland, Spain and Italy. 3 in 5 odds

(3) More stimulus. 4 in 5 odds

(4) Less austerity. 2 in 5 odds

(5) Loosen the China yuan exchange. 1 in 5 odds

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