European Debt Crisis (3 of 3) - Solutions! or Solutions?

As the European Debt Crisis deepened towards the end of 2011, European leaders are under tremendous pressure to find ways to contain, if not to solve, the problem. On 26 October, 2011, EU leaders met in Brussels to hold marathon talks and worked through the night into next morning to come up with an agreement described as vital solutions to the huge debt crisis. Essentially, the agreement consisted of three parts:
1. The European private banks holding Greek bonds agreed to write off 50% of their face value. Effectively, this will lower the Greek debts from the expected 180% to 120% of their GDP by 2020. Although the figure is still enormous but now is more sustainable for an economy driven into recession by austerity measures.
2. European banks will be required to raise about 106-billion euros in new capital by June 2012 to increase their holdings of safe assets to 9% of their total capital. This would help protect them against potential losses resulting from any government defaults, and hence avoid any potential bank crisis.
3. The main euro bailout fund - European Financial Stability Fund (EFSF) - will be expanded from 440-billion euros set up earlier this year to 1-trillion euros. This would be sufficient to provide guarantees for bonds issued by countries including Italy and Spain.

The first part provides a short-term action to alleviate Greek's debt burden. By having the European banks writing off 50% of their debts, it would give some breathing space for Greece for some time. But with the still staggering figure of 120% debt to GDP ratio (doubling the EU limit of 60%), coupled with the weakening economy due to the austerity measures imposed on the country in exchange of the EU bailout packages, will Greece be able to repay or reduce its debts by itself?
The second part aims to provide a medium-term firewall to protect European banks from any potential government defaults. However, this is just a target set by the EU leaders. No information is yet available on how to raise the 106-billion euro of fresh capital. Given the banks taking up 50% loss of their Greek bond assets in support of part 1, will the banks be able to further raise that level of capital by June, 2012?
The third part aims to provide a longer-term pool of fund to help bailout euro countries with financial difficulties, especially larger economies like Italy and Spain. But how to boost up the fund to 1-trillion euro is still yet unknown. The head of EFSF traveled to China right after the EU meeting on 26Oct to discuss on possibility of China's contribution as China is one of the few countries with good financial reserves. But will China be willing to invest in this risky business? China may ask for political returns in exchange of their financial contribution if they do invest. Will EU be able to accept? If not, where will the money come from? Further questions may also be asked. Is the 1-trillion euro fund enough given the (seemingly endless) bailouts needed for the debt countries? Is the continual bailout a right strategy to resolve the crisis?

The EU leaders, especially Germany and France, are very determined to maintain the integrity of the EU and the Eurozone. They worked very hard to try to keep Europe intact from disintegrating due to debt problems of eurozone members. They are very anxious and keen in implementing the plan agreed on 26 October, 2011 to resolve the crisis. But with the ever worsening situation in Europe, especially recently with Italy which is the third largest economy in eurozone after Germany and France - an economy too big to be saved, lining up to a brink of falling after Greece, can it really solve the crisis? If not, what are the real solutions?????

Only time will tell!