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Digesting the outcome of the marathon overnight euro-zone summit boils down to four central points:
Short on detail, but euro-zone leaders might have come up with less, which could have been a catastrophe for European markets. Agreeing to a 50% writedown on banks’ Greek government bond holdings already last night wasn’t always expected.
Ironing out the prickly details with banks, regulators, governments and parliaments will treat financial markets to weeks, if not months, of more uncertainty.
Despite an 11th-hour letter promising reforms, Italy and its disorderly political landscape has emerged as the next European Union ‘management problem.’
The Summit’s emergency-response pact is entirely defensive in nature, throwing up more bulwarks against fiscal rot and bank runs without creating a growth component.
Hurdles remain, including tough negotiations with banks, who have sought politically problematic guarantees when ‘voluntarily’ participating in Greek debt relief plan. Another issue is avoiding the implied 50% writedown on their Greek debt amounting to a Greek default, which could devastate the bond markets of weaker euro-zone countries.
Financial markets will open Thursday jubilant that the leaders of the 17 euro-sharing countries laid the foundation for guarding against the debt crisis spreading from Greece to Italy and Spain, a threat that could have scuttled the euro and trigger a global financial crisis.
Will it work? What’s missing is a focus on filling fiscal gaps by getting Europeans back to work.
Europe’s second big threat is a new recession that could undo the last night’s progress. Nary a word on growth and investment needed as a proactive cure to fiscal deficits, lower welfare costs and higher tax intake. Instead, the mantra being handed down from the European Commission and the International Monetary Fund is more spending cuts and revenue creation.
Greece, at the core of the crisis, is facing a fifth year of recession in 2012 with a growing risk of civil disorder as still more austerity measures bite. Spain and Italy could soon show contracting economies. Deutsche Bank now believes that even the German economy could slip into a shallow recession for the next two quarters.
Some elements of the pact sketched at the summit can act as growth retardants. One example is the plan to recapitalize Europe’s 70 biggest banks by EUR106 billion, to meet a higher capital requirement. Details on the source of this new capital aren’t finalized.
But the process risks, at best, curbing lending activity, and at worst, will require input from already impoverished governments. Taxpayers also risk exposure down the road from plans to leverage a new bailout fund and insurance demanded by banks for Greek debt relief
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