Wednesday homework:

1) Outline the measures agreed at the eurozone heads of government summit on 21 July.

• Greece, Portugal and Ireland will have the interest rate on the money borrowed from the European Union cut to 3.5%.
• An agreement by private-sector creditors to accept a writedown on their Greek debt.
• Boost economic growth in Greece, with the deployment of "structural funds" under a European "Marshall Plan". The members said they would "mobilize all resources necessary in order to provide exceptional technical assistance to help Greece implement its reforms".

2) Explain what is meant by a ‘haircut’ in the context of debts. What types of haircut were agreed at the summit?

Haircut  – the private financial sector to offer facilities such as bond exchange, rollovers and buybacks "on conditions comparable to public support" but on a voluntary basis

3) How big a reduction in Greece’s debt stock will result from the deal? Why may it not be enough?

"More than expected but not enough to make us sleep comfortably" - According to some Berclay specialists the deal lacks of details in areas like private sector involvement for Greece and collateral requirements. Also, the overall project will not be sufficient until the whole debt of PIGS will decresase, which suggest that the case of Greece cannot be solved without a greater action in Southern Europe economy.

4) Explain how the European Financial Stability Facility (ESFS) works? How will this change as a result of the agreement?

EFSF is authorised to use the following instruments linked to appropriate conditionality:

• Provide loans to countries in financial difficulties
• Intervene in the debt primary and secondary markets. Intervention in the secondary market will be only on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability
• Act on the basis of a precautionary programme
• Finance recapitalisations of financial institutions through loans to governments

To fulfill its mission, EFSF issues bonds or other debt instruments on the capital markets.

The main change after the agreegement is that the interest rates for Greece were lowered to 3,5% .

Also the EFSF will be allowed to "intervene in the secondary markets". It may fund "recapitalisation of financial institutions through loans to governments including in non programme countries", code for Italy and Spain. The full weight of the German-led creditor bloc will stand behind south Europe's banking system.

5) What vulnerabilities remain in the eurozone?

The overall economic crisis. Economies of all eurozone are at the slow dow, in terms of the GDP growth. Some other, major eurozone countries are getting closer to the bankrupcy line, for example, Italy. The national debts are simply to high.

6) What are the arguments for closer fiscal union in the eurozone? Is more required than merely a return to the Stability and Growth Pact?

The main arguement is that closer fiscal integration will prevent net crises to so easily appear. When each country's finances were more severely controlled, states would not be able to run into massive debts anymore. The natural trade-off is a certain decrease of member state's soveregnity.