The gloomy outlook takes its toll

WITH every passing day, the shelf-life of eurozone's rescue package is getting shorter. On July 21, eurozone leaders agreed to a second Greek bailout (see Greek Bailout Mark II: It's a Default in this column on July 30, following the first, Greece is Bankrupt on July 2). European parliaments have yet to complete ratification to expand the 440 billion euros bailout fund (European Financial Stability Fund or EFSF). Already, talk has shifted to expanding the EFSF in the light of escalation of the crisis.

Frankly, the fund is just not large enough to halt the contagion. It's a matter of market confidence really the larger, the better. About one-half of the fund is already committed or utilised with more demands coming on. Greece will miss the deficit targets for this year and next despite austerity, showing the drastic steps taken to avert bankruptcy are not enough. The crisis is boiling over. Eurozone ministers have since delayed the release of 8 billion euros cash scheduled for Oct 13, threatening to revisit the deal where private bondholders may be asked to take a higher “haircut”. This has rattled markets and raised fears of an imminent messy default. Estimates are that with a 60% haircut (21% now) for private bondholders, Greek banks would suffer another 27 billion euros write-down, wiping out their capital. Inevitably, the fall-out will have much wider repercussions.