No Silver Bullet!

EU Deal to write off 50% of Greece's debt could be a step in the right direction but no silver bullet. Risking only some of new money into the system EU is actually smoothened the imminent default by adjusting write offs over a period of time. It sure comes as a big relief in the midst of gloomy economic situation, but interesting aspect of it is the voluntary write offs. It needs to be seen if the voluntary write offs equals required 50% of the total debt to be written off. In addition EU will have to pay for the other 50% through some sources to keep Greece & Euro zone economy running.

At times it is good to let go things that are beyond repair, EUs approach to let go in a controlled way seems to be a practical one. Damage is done and there would be collateral damage because of this decision, but it wouldn't come as a rude shock like the 2008 Lehman Brothers bankruptcy. Greece could well be saved and in worst case scenario all the debts may be written off in a cal liberated manner and it may be asked to exit Euro for its rogue financial practices. If other Euro Zone countries were to default then the same solution may be considered appropriate because of the fiscal situation across the globe, but they may not face the situation of being thrown out of Euro.

If voluntary write off works then would it solve the current crisis? It wouldn't but it will not bring down the global economy crashing. Best case scenario growth could slow down and worst case scenario we could be in a recession for may be an year or two. It is going to take a while before balance sheets of all the countries start looking good again, until then it is going to be tough fight against the monster called debt.

For the global stock markets it is a good news at least for now, as the economy is more predictable because of the non catastrophic nature of the deal. Markets could be in a band and may be volatile but doesn't present the situation of a crash. This presents very good opportunity to predict cashflows and pick some good businesses to invest.

Having said this we could be in a catastrophic situation even after all the systematic write offs because of contagious nature of the problem and lack of required stimulus in the system. We are still in the risk zone until fiscal situation improves, but bets are on until the news of some country defaulting surfaces. Go long as long as countries don't fall short of cash.