Act II of the European Summit is going to take place on Wednesday (Act I concluded on Sunday), when the world will see whether the hints about "progress" in stanching the European debt crisis have a basis in reality.
It is now apparent that what Europe had tried to avoid for the past half year, a restructuring of Greek debt - and in simple terms a default - is no longer avoidable.
Those holding Greek bonds are going to get a "haircut" and receive back only 50% (and there is even talk of 40%) of their loan. This will help Greek debt to contract to 110% of GDP --a Matterhorn rather than a Mount Everest to climb.
The EU had previously been warned there was no conceivable way that Greece was going to meet the previous debt targets within an austerity policy that guaranteed negative growth. Now the denial is over. "As the economy rapidly shrinks, debt would reach extremely high levels in the short run at 208 percent of GDP," they admitted.
Europe's reluctance to contemplate a "haircut" was a result of fears that this would create a crisis of confidence in the banking system. Pursuantly, now that the realization has set in that Greece will not pay back its debt, it is necessary to shore up confidence in the European banks (since a large share of the Greek bonds are held by the banks and particularly French banks).
The only things bigger than the banks are the countries themselves and it was hoped that a show of commitment by the major European economies, particularly the traditional Franco-German motor of the EU, would do the trick. This would be the "big bazooka" sought by the policymakers to restore investor confidence and deter speculators.
The problem is that even if the European Union as a whole gets involved, that whole is only equal to the sum of its parts. I
f France makes an excess of commitment to back up banks and perhaps Spain and Italy, its own finances might become spot suspect and it's ratings would be downgraded from their current AAA, increasing French borrowing costs.
If the major EU economic powers lose their creditworthiness, the big bazooka would become a cap pistol. There has even been talk of a credit downgrade for Germany, the linchpin of any economic rescue plan, should Germany's commitment become excessive, given the projected decline in growth for the German economy.
A further complication is increasing resistance on the part of national legislatures and the electorate to further financial commitments. As a result of a German court decision, for example, the German government must involve the legislative branch on a more intense basis. It is becoming an increasingly hard-sell to ask for further economic contributions.
This explains the attempt to recruit sovereign wealth funds outside of Europe, such as those of the Gulf States. China is also seen as a possible lender of last resort, but this would weaken Europe's hands in negotiating with China over trade practices and even the occasional remonstrance with Beijing over human right violations.
There is no choice but to wait for the curtain to rise again on Wednesday.