No $2.7tn euro fund, no Greek haircut deal, no end to the eurozone crisis

When the eurozone leaders complete their summit on Wednesday they had better come up with something better than this to please financial markets, or are they just downplaying expectations so that whatever they can cobble together is billed as a triumph?

This would not be the first time that a comprehensive solution to the eurozone sovereign debt crisis has been announced. We heard the same as recently as March this year and then again in July just in time for the August summer holiday.

Bigger stability fund axed

However, it is clear that the $2.7 trillion ‘bazooka’ fund is off the table. Germany has spiked this big gun though the European Financial Stability Facility may be able to guarantee bond sales or seek outside investment in such bonds.

Banks are apparently holding out for a 40 per cent haircut deal on Greek sovereign debt but the IMF is pushing for 60 per cent. The write-offs required at the banks will threaten their solvency and mean huge increases in capital at a very difficult time.

One estimate is that $160 billion will have to be found, first by the banks themselves, then their national governments and only finally by recourse to the EFSF. Will the EFSF be large enough for this task?

Certainly not if it had to pay out to meet the full impact of a Greek default on the current numbers. Bank lending is going to be squeezed hard in the eurozone. Standby for a deep recession and much tighter credit conditions.

Endgame nears

So will this be another sticking plaster over the sovereign debt crisis until it comes off and another has to be found? This is no endgame because the problem just becomes bigger and bigger. A Greek default now, for example, would be three times bigger than if it had been done 18 months ago.

Kicking the can down the road cannot go on forever. As the Greek paradigm shows austerity to reduce spending causes recession and actually pushes the debt up and not down. You really have to pull the plug and move on.

Well, we will have to wait until later on Wednesday to see what 27 heads of state and 17 eurozone members can come up with but it will fall well short of US prescriptions for a comprehensive solution – prescriptions that many Europeans think are utter madness – and markets will not like that.