As we discussed in the most recent Broyhill Letter:
Given the size and the maturity profile of the country’s debt, combined with the absence of monetary policy as a tool to reflate the local economy, external assistance is needed to avoid crisis. But financial rescue packages come with difficult fiscal demands at a time when Greece is already facing a backlash from unions and civil servants. Importantly, any assistance must be significant in size, as well as quick and efficient in order to prove successful. Unfortunately, history suggests policymakers will miss at least one of these targets at first blush and initial attempts will likely prove too little, too late. We consider the EU’s ringing endorsement of Greece’s fiscal plan as strike one. Strike two will likely be an insufficient response aimed at calming investors’ nerves and reducing volatility. Any subsequent market reaction would thus be short term in nature, ultimately leading to increased risk of contagion as sovereign balance sheets become a growing theme across the globe.
We submit today’s Statement by the Heads of State or Government of the European Union as “Strike Two.”