Europe Resolves Only Half its Issues

Oct. 24, 2011 - PRLog -- European leaders are about halfway along in the marathon decision-making process that is intended to put an end to the debt crisis. This process also includes plans to aid banks and eliminate pressure on the European Central Bank to increase the European Financial Stabilization Fund (EFSF). Stocks rose along with the Euro after Europe’s 13th summit in the past 21 months, where measures to increase the International Monetary Fund’s role were also examined. The Euro zone leaders ruled out a forced restructuring of Greece’s debt and instead tried to persuade bond holders to assume the risk of losses if they wanted to get their money back in order to help the country’s finances recover. China announced today that it “believes in” the European Union’s ability to overcome the crisis.

DT Trading analysts think that the tactics intended to reduce bondholders’ speculative gains will also help the Euro zone to avoid inflating a bubble of government debt in the future. It is apparent that the more Europe tightens its belt, the bigger the risk of social unrest will be to those countries that turn out to be borrowers in the current situation. On the one hand, those countries with liberal budgetary policies did violate EU regulations on the maximum amount of allowable government debt and should pay accordingly, but on the other hand, cutting government expenses to cover current debt doesn’t give the population much incentive to “work off” their per capita share of the debt. An exit strategy for this kind of situation would be to prompt investors to avoid investing in risk assets or for them to acknowledge that the Euro zone’s troubled countries need more time to relieve their expense burden for paying the debt. The final version of the bill will be known only at the summit in two days, where German Chancellor Angela Merkel will return to Berlin to consult with legislators and get them to reach a decision on further steps. Like yesterday’s summit, this one will begin with a meeting of all 27 EU leaders before the 17 Euro zone leaders meet in private.

Germany has achieved the most success since these summits have begun by overcoming the French leadership’s efforts to expand the EFSF, which would have allowed France to borrow unlimited and potentially huge amounts from the European Central Bank. Politicians are coming closer to agreement on the EFSF, which will guarantee sales of government obligations as a means of expanding its functions. The second option would create a secured EFSF fund which would attract foreign investors for distressed bonds. According to DT Trading economists, this would likely be done with the prospect of using foreign investors to replace Eurobond owners in order to provide security and prevent speculative games that could inflate the debt bubble for the peripheral countries. If the second option wins out, then this would help to weaken and maybe even eliminate the role of foreign speculators in the future in the game against Euro bonds and Europe as a whole.

The Euro rose 0.4% to $1.3951 and was trading at $1.3897 as of 9:49AM in Berlin. The Stoxx Europe 600 Index rose 0.5% to 240.12 for the second trading day in a row.

DT Trading Limited Analytical Department

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