You have to give it to the European Council. They are pretty good at stitching up impressive looking deals, having lowered expectation to a bare minimum beforehand. But the effectiveness of an agreement should not be gauged by the immediate market reaction, let alone by how the agreement compares with expectations.
For it to be a positive contribution to the eurozone debt crisis, it should meet three tests. Will it put Greece on a path towards sustainable debt reduction? Will the new rules for the European financial stability facility make contagion less likely? And is the participation of private investors realistic and fair? My answer to those three questions would be, respectively: no, no, and yes.
Regarding the first question, the Institute of International Finance estimated the total reduction in the net present value of Greek debt to be 21 per cent. Nicolas Sarkozy, the French president, talked about a 24 percentage point reduction of the ratio of debt to gross domestic product. His is a more conservative estimate. In other words, the Greek debt-to-GDP ratio would not peak at 172 per cent, as one forecast suggested, but at 148 per cent. None of these numbers will come even close to a sustainable debt level. On my own calculations, Greece requires a reduction in the net present value of its debt by about 50 per cent. This agreement comes short.