Yet another last-minute deal has been done to save the euro.
Markets are leaping, the single currency has followed suit, and all is right with the world again.
So what have they done this time?
And how long will this particular sticking plaster last before the next panic?
Has Europe finally solved its debt crisis?
Europe had a long day yesterday, stuffed with melodramatic announcements and rumour-mongering. Angela Merkel alluded to the wars, warning her countryfolk that “if the euro fails, Europe fails”.
The usual nonsense, in other words. My memory of school history isn’t great, but while the World Wars had numerous causes, I’m pretty sure that the fact that some people used francs while others used deutschmarks, wasn’t one of them.
In any case, a rabbit was pulled out of the hat once again. As I wrote last week: What the stalemate in the eurozone means for you, Europe had to do three key things at this summit (which is the 14th such gathering in the last 21 months).
First, they had to sort out some sort of realistic ‘haircut’ for holders of Greek private debt. Second, they had to face up to the fact that many of Europe’s banks are still basically bust. And third, they had to figure out a way to make the European Financial Stability Fund (EFSF) big enough to save Italy or Spain.
At first sight, it looks as though they’ve achieved all these things. Private sector holders of Greek debt will now take a 50% hit (bear in mind that plenty of holders will still make a profit – these things were trading at below that level in the market).
Meanwhile, European banks will be forced to raise another €106bn in capital by June 2012. And the EFSF’s firepower is going to be expanded to around €1 trillion, from the current €440bn. The idea is that this should hopefully be enough to stop people worrying about Italy and Spain’s solvency.
So far, so good. But is it enough?
The devil is in the detail
The trouble is, we knew most of this before the big summit. And the details have yet to be hammered out. In other words, this is a statement of intent, not a done deal..
And even the overview isn’t that impressive. The plan to cut Greek debt may sound ambitious. But it will only reduce debt-to-GDP to 120% by 2020. Bear in mind that anything above 100% is generally seen as unsustainable.
On top of that, what about the other indebted countries? As Gavin Blessing of Collins Stewart tells Bloomberg, debt relief for Greece presents the Irish government with “a political problem”.
“The Greeks, who are seen to be behaving badly, get rewarded whereas the Irish, the top boys in the class, get nothing.” You could say much the same for the Portuguese, who have recently pushed through yet more unpopular austerity measures.
But that’s a side issue compared to the questions around the EFSF. The idea is that Europe will ‘leverage up’ what’s left in the EFSF pot (around €250bn). It’ll do this by using the money to insure against the first 20% of losses on new bonds issued by Italy and Spain.
European politicians are also hoping that China will get involved in supporting the fund – we’ll find out later today if they’ll pull that off. We’ll also find out what it might cost in terms of improving China’s access to European markets.
There still isn’t enough money to go around
As you can see, everything is still rather up in the air. However, the biggest sticking point is that the European Central Bank (ECB) isn’t involved in any of this.
The reason that Britain, the US and arguably Japan haven’t gone bust yet is because they have central banks that are able to print money to buy their own bonds. I’m not convinced that this is a healthy situation, but it does mean you can put off a day of reckoning for a very long time.
Europe is not at that point yet. And until Germany gives the ECB the go-ahead to print Europe’s way out, we’re going to be returning to these summits over and over again. Because fundamentally, there still isn’t enough money to go round to deal with all these debts.
Will Germany ever accept money-printing by the ECB? It’s hard to say. With a new ECB president, Mario Draghi, replacing Jean-Claude Trichet, the odds are rising that this is the end game. But there are a lot of hurdles to clear before that happens.
So expect markets to be back in ‘risk-on’ mode for a bit, particularly if economic data out of China and the US remains better than expected. But the rolling crises in the eurozone won’t end, which means you should stay defensive.
That’s not to say there aren’t any opportunities around in Europe. Next month, we’ll be getting a group of Europe experts in to talk about the situation and tell us about any bargain stocks they see in the region. We’ll have the full story in MoneyWeek magazine – if you’re not already a subscriber, get your first three issues free here.
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