Eurozone: We'll be right back...

The super duper master plan is not ready, yet. Eurozone leaders took some steps
but spanners are still in the works.

The first three-day session of Eurozone and European leaders and finance ministers has not yet delivered the big, ultimate, super duper master plan. To be honest, this had almost been expected. Except for uplifting comments, no new facts or conclusions were presented. However, on a more positive note, reading between the lines, listening carefully to press conferences and assessing wire reports, the meetings seem to have delivered some more details of how the plan could look like. The four elements are still the same: a second Greek bailout package including a higher private sector involvement, bank recapitalization, EFSF leverage and more economic governance. Even if politicians tried to be uplifting, there are still some important unsolved issues.

As regards the second Greek bailout package, leaked reports from the Troika suggest
that a second Greek bailout package would require more than 252bn euro to finance
Greece until 2020, instead of the 109bn euro mentioned in July. According to the leaked documents, the 109bn euro package would only be sufficient if private sector bond holders would accept a haircut of 60%. Whether Eurozone politicians can achieve such participations on a purely voluntary basis is unclear.

As regards bank recapitalization, the new ballpark number is 100bn euro. Apparently,
troubled financial institutions must first attempt to raise fresh cash from markets. If unable to do so, national governments will then have to provide back-stops. Only if governments are too weak to be able to perform this task, the EFSF could step in. However, no final agreement has been reached, yet.

As regards leverage for the EFSF, this still seems to be the biggest unfinished
construction site. According to German Chancellor Merkel, leverage through the ECB is
not an option (anymore). It looks as if two options based on the German sovereign
insurance mechanism are currently discussed. One is the original German proposal
through the EFSF and another one could bring the IMF on board, using a special purpose vehicle.

As regards economic governance, this remains a long shot. European leaders officially
backed a "limited treaty change" that will involve tightening fiscal discipline and
deepening economic union. A new fiscal discipline 'super-commissioner' for the Eurozone will be created, although it remains unclear whether this could be done without Treaty changes. Let’s not forget, Treaty changes will have to be agreed by all 27 countries and not only the Eurozone countries.

It did not come as a real surprise: this weekend’s series of Eurozone summits and
meetings did not deliver concrete results. However, the contours of the big master plan have once again become a bit clearer. In a way, it is like in the good old US television cartoons: don’t go away, we’ll be right back after these messages. See you again on Wednesday.