In the wee hours of Thursday morning, European leaders agreed on a plan to shore up the continent’s banking system and stem the contagion affecting sovereign borrowing costs in every country from Greece to France. The plan has three parts: the European Financial Stability Facility will be expanded to about 1 trillion euros, Greek bonds held by private banks will be “volunarily” exchanged for new bonds worth half as much, and the banks most affected will get about 100 billion euros to strengthen their capital positions.
It sounds impressive. Two indicators will show whether it is enough: the spread between Italian and German borrowing costs and the share prices of French banks. So far, neither has meaningfully improved—with good reason. The “plan” has not really been finalized. More worryingly, even if it is implemented in full it would fail to address the fundamental problems plaguing the financial system.
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