The markets’ giddy response to the eurozone debt-crisis solution agreed by European leaders this week is a case of investors willing themselves to see the glass half full. The combination of the eurozone’s bailout fund, the European Financial Stability Facility (EFSF), being bulked up to €1 trillion, a €100 billion recapitalization of Europe’s banks by June next year and private bondholders being asked to take a 50% haircut on Greek debt is at least more palatable than any of the doomsday alternatives–an unruly Greek default, an unraveling of the euro and a collapse of the banking system.
Yet the euroleaders’ plan, belatedly pulled together with all the one minute to midnight brinkmanship that Congressional leaders in the U.S. showed in July over America’s debt-ceiling debate, similarly depends on the details being fleshed out after the event. These include whence to raise the money for the EFSB and on what conditions to ensure the participation of the likes of China and the IMF. They also include the sleight of legal hand that will be needed to ensure that an orderly part Greek debt fault–for that is what the bondholders haircut is–does not trigger a credit default swaps crisis.
Getting those and all the other many, many other implementation details right will determine how much risk this solution has really taken out of the euro crisis, or whether it has just papered over the cracks.