Euro Bailout Plans: Have We Made Progress?

So the weekend is over, and as Angela Merkel signalled late last week, there was no "big bazooka".

The European Council meeting ended on Sunday without any grand announcement about new measures aimed at shoring up the single currency.

And yet markets seem, so far at least, to be sanguine about the news. Are they right? And how much, if any, progress has actually been made behind-the-scenes on the European rescue plans?

Supporting the banks
Progress rating: 7/10

This is where most of the progress this weekend occurred. In a 10-hour meeting on Saturday, finance ministers from all of Europe agreed that just over 100bn euros in capital would need to be injected into their banks. Although there won't be an official announcement on this until the rest of the package is unveiled, this is certainly progress.

Moreover, given that this is an issue the European Banking Authority has been monitoring closely in recent months, it is also relatively clear which banks will need the most capital - particularly those in France, Germany and the troubled Mediterranean countries.

However, there are still some points where we're still in the dark. First, where will the extra capital come from? In most cases, private investors are unlikely to want to put more money into an already stricken bank, so Governments will have to intervene. But, as yet, individual governments have yet to reveal how much they will spend.

In the case of some countries - for instance Greece, Portugal, Italy and Spain - the Government may have to rely on funding from the euro bailout fund (see below), but, again, this support has not been confirmed.

Second, banks will need other support - perhaps emergency liquidity measures and credit guarantee schemes - to help them through these difficult months. While we know such schemes were discussed in Brussels, they haven't yet been finalised, still less announced.

Third, does the big figure include the 46bn euros worth of capital which has already been earmarked for banks under previously-agreed bailouts for Ireland, Greece and Portugal?

Bigger Greek haircuts
Progress rating: 5/10

If the Greek bailout is to succeed, there is now little doubt that the country will have to write off a significant chunk of its debt. Back in July it struck a deal with private sector investors to reduce the value of their Greek debt by 21%. The eurogroup ministers agreed on Friday that this needs to be increased, but there is still some dispute over the ultimate level. The French had been vehemently against this since they contend that anything over 45% is likely to trigger a "credit event" - a chaotic default which could destabilise markets. However, the International Monetary Fund has been lobbying aggressively behind the scenes, indicating that it will be unable to participate in a further bailout of the troubled country (which it desperately needs) unless some of that debt is written off. So among the politicians at least the consensus is moving towards a so-called haircut of 50% or even 60%.

Unfortunately, the other side in the negotiations - the bankers and investors themselves - are far less keen on such a significant reduction in their holdings.

Increase size of EFSF
Progress rating: 3/10

This is the big one. In the end, both other parts of the three-pronged package depend on the notion that the euro area will have a generously-proportioned bailout fund with the capacity to support Italy and Spain.

The European Financial Stability Facility, a kind of IMF for the region, currently has firepower of 440bn euros, but this is barely enough to support the periphery economies if they need further help - let alone Spain or Italy, the latter of which has to raise around 250bn euros on the private markets in 2012 alone.

The plan is to increase the size of the EFSF - with the ideal target being around two trillion euros. This can't be done by securing more direct guarantees from euro member states (in fact, Germany's constitutional court has ruled this out) so instead the Europeans want to leverage it up.

There are two main avenues through which one can do this:
Use it to insure future government debt issuance from troubled countries. Under this scheme, the EFSF would insure the first 20% or so of investors' potential losses should a country default. The idea is that this way the EFSF's firepower could be increased fivefold. Unfortunately, this disregards the fact that much of the EFSF's money has already been allocated to Portugal and Ireland, and some more will have to go to Greece. There are also pretty serious questions over whether the plan is convincing enough for markets.

Create a Special Purpose Vehicle which would draw in cash from investors around the world and promise them that the EFSF warchest would absorb the first 20% or so of losses. There was also talk in Brussels that this plan would allow the IMF to contribute, although this could be optimistic, as does the assumption that the majority of the other cash will come from sovereign wealth funds in the Middle East and Asia.

According to insiders, both of these plans could work alongside each other. But do they pass the smell test? For one thing, they both rely on complex financial structuring which, as the crisis of 2008 has shown us, is often used to disguise losses rather than address them. It involves piling debt upon debt to address problems of over-indebted nations. It is a sideways look at fiscal union (the one thing which could really save the euro) but without actually engaging with it seriously. And perhaps most strikingly of all, both of the above plans look unlikely to make the apparent firepower of the EFSF more than one trillion euros.

We'll hear more about how these plans are emerging as the week continues. And we'll have a full assessment on Wednesday and Thursday as to whether they have the detail and substance necessary to satisfy markets and signal the beginning of the end of the eurozone's woes.