A wave of “Europhoria” swept over the markets overnight in the wake of the announcement of a deal to tackle that which ails some of the region’s countries and many of its banks. The day-long standoff that threatened to take on the characteristics of a Mexican one ended when banking representatives lost the arm-wrestling match with the “Merkozy” team and decided that taking something is better than taking very little at all.
This “EuroCup” showcased the “passing” skills of the Franco-German team at the end of the evening. Perhaps the banks made a wise decision in all this; they are, after all, in need of raising €106 billion in fresh capital in order to comply with the tougher rules coming from the European Banking Authority. Thirty of those billions needing to be raised are for Greece’s banks. The other 69 that fall short of capitalization minimums will have to duke the remaining 76 billion out, somehow.
In brief, the latest (final?) plan calls for creditors to receive half of what they invested into Greek debt (a “crew cut” but not a head-shave) and for the EFSF to be boosted to the magic €1 trillion mark. Men in black (suits) were photographed exchanging many manly hugs after the meeting finally came up with the aforementioned figures. French President Sarkozy said that Greek bondholders “voluntarily” agreed (finally) to a 50% write-down of the value of their holdings.
The IMF will also have a larger role to play in the new European financial equation, as might…China. Monsieur “New Papa” Sarkozy plans to call China’s Hu Jintao today to ascertain if he might “contribute” to a new fund aimed at fixing the debt problem. Coincidentally (not) the EFSF’s chief executive is scheduled to visit…Beijing tomorrow. UK Chancellor Osborne tried to cool down expectations of IMF largesse toward Europe by saying that “we would not be prepared to see IMF resources reserved for the Eurozone.” Yes, there are many other countries out there – hats in hand – waiting to receive some dough from the International Monetary Fund.
It is just a bit funny that the word “voluntary” has come into the post-game conversation to describe that which debt holders have accepted. It was their contentiousness that had in large part kept the guessing game and agonizing process of coming to a resolution on the front pages for weeks. But, hey, an “involuntary” write-down would have meant that we had a “credit event” on our hands. You know how markets tend to react to “credit events.” As for the now larger EFSF, well, it could be large enough to avert the so-called ‘contagion’ and the need for holdings fresh, similar summits on the subject of what amounts to write downs for Spanish or Italian debt.
The common currency soared to a near two-month-high (above $1.40) while the US dollar was left by the side of the road like a jilted lover by the specs. Stock markets went into orbit while shares of banks such as SocGen and Deutsche Bank soared by nearly 10%. The Dow was preparing to have a very, very good day today. Something else that the US stock market might well celebrate today is the release of US economic metrics. Despite the incessant gloom and doom being doled out in generous heaps in various newsletters, the American economy showed that it performed a whole lot better than such expectations.
It was anticipated that US economic expansion took place at an annual ‘speed’ of 2.8%.The actual number was 2.5% and albeit it was under the forecasted figure, stock futures remained higher in the 45 minutes prior to the opening bell on Wall Street. Such a number is more than double of those that came in for Q2 and spooked not only the aforementioned financial scaremongers but the markets and the Fed as well. Ironically, the progress that the US economy made on the quarter probably took place because the American consumer and the country’s business community did not cower in a cave and stopped investing, producing, or consuming. Household purchases, for example, rose by 2.4% in the period, which was higher than had been projected.