LONDON — EU leaders are meeting in Brussels for a summit on the euro zone crisis for the second time in less than a week. As a service to our readers, GlobalPost is looking at the key questions facing the leaders. They are listed in the order the answers need to be agreed on.
1. How big a haircut will holders of Greek debt (or the CDS of those bonds?) have to take?
The accepted best estimate is around 50 percent.
Reuters is reporting holders of Greek bonds would receive 15 euros in cash and 35 euros in 30-year, 6 percent coupon bonds for every 100 euros of debt they own.
About a third of the debt is held by non-Greek private banks, most of them located in Europe. As they total up what this loss means it becomes clear that some of those institutions may not have enough capital on hand to absorb the shock. They need to be re-capitalized to the tune of 100 billion euros ($140 billion). This leads to question two.
2. Where will the 100 billion euros come from to re-capitalize banks? Central banks? Private investors — say, George Soros?
Benedicta Marzinotto of the Breughel think tank in Brussels says, "It's not clear, yet. Partly through the individual central banks of euro zone members, partly through the IMF's flexible credit line."
OK, that's Greece and its creditors dealt with, but the big headlines of the last few days relate to Italy. Those numbers are terrible.
Italy accounts for 25 percent of European debt. By comparison, the combined debt of Greece, Ireland and Portugal is 7 percent.
The country's debt is 120 percent of GDP, around 1.8 trillion Euros ($2.5 trillion). According to the BBC, it needs to issue bonds worth 600 billion euros ($836 billion) to cover payments on debt that mature over the next three years.
And then, it is a nation led by Silvio Berlusconi. Who wants to buy debt like that?
What happens if Italy can't meet its obligations?
Where is the "firepower" to "ringfence" Italy's debt crisis?
This brings us to question three.
3. The European Financial Stability Facility of 440 billion euros was set up to help countries with debt problems. Around 200 billion of that fund has already been spent bailing out Greece, Portugal and Ireland. But how do you leverage 250 billion that's left in the kitty by a factor of five to reach the 1.25 trillion euros experts agree is necessary to prevent an Italian crisis knocking over the whole euro zone?
I have been asking experts this question since the idea was first brought up in September at the annual meeting of the IMF.
At the time, Simon Tilford of the Centre for European Reform think tank in London wasn't sure himself how it would be done. Today he says things are a little clearer. "The ESFS will insure the bonds of various countries," Tilford says. "The EFSF will not be injecting any money into the situation." Instead, Tilford explains, Europe's leaders hope that the fact the fund will guarantee 20 or 25 percent of an Italian or Spanish bonds will entice investors to take the risk. As an Italian sovereign bond is currently paying more than 6 percent in interest it might well be a risk worth taking.
"But," adds Tilford, " this leaves all the underlying questions in the air."
Which brings us to question four.
4. What happened to the euro zone taking steps towards fiscal union?
The structural flaw in the euro's construction was noted by its creators twenty years ago and have been underlined in capital boldface in the last six months. A currency union necessarily needs unified tax policy, and for that matter a common fiscal policy to contend with economic discrepancies. Europe doesn't have that — the EU's budget is tiny compared to each country's. Moreover, the European Central Bank's mandate is focused on inflation alone, not on unemployment. So when prices began ticking up in Europe earlier this year, the ECB made it more expensive to borrow — even though that policy exacerbated soaring unemployment rates in Spain, Greece and elsewhere. Tilford points out, "You need the European Central Bank to play as active a role in shaping policy as the Fed, the Bank of England and the Bank of Japan do."
But to have those things you need a single political entity to oversee all the institutions and help formulate macro-economic policy.
What steps have been taken towards that closer union?
A sardonic laugh is the only answer.
Which leads to the final question:
5. How long can this go on?
At September's IMF meeting the world's finance ministers gave Europe's leaders until next week's G-20 summit meeting to solve the euro zone's debt problems.
As of today the best they can hope to see is an agreed upon template for such a solution with plenty of i's to be dotted and t's to be crossed ... and individual, sovereign parliaments to be stroked before a unanimously agreed plan comes to fruition.
It may be that the answer to the question "how long can this go on" lies in how markets react to whatever the Europe's leaders agree today, or tomorrow ... or the day after that.