Euro-zone Update 31/10/2011
The deal involves a three-pronged approach, encompassing an increase to the European Stability Fund from €440 billion to €1 trillion, shoring up bank balance sheets by requiring an additional €106 billion of capital to be raised and allowing Greece to reduce its debts by 50%. Initial market reaction was somewhat understandable, with investors abandoning previous risk aversion to send stock markets worldwide several percentage points higher, in some cases as much as 6%.
However, while the framework announced did bring some degree of clarity to the situation, investors are questioning whether the package went far enough. With estimates that the Stability Fund needs to be nearer the €2 trillion level in order to adequately cope with possible defaults by Spain and even Italy, as well as a distinct scarcity of technical details as to how the package will be implemented, a degree of scepticism remains. Fiducia’s economic adviser, Michael Hughes CBE, commented that the one measure that would have made a tangible and lasting difference was not included, namely expanding the borrowing powers of the European Central Bank. Such a move would have been taken as a step towards greater collective responsibility and policy integration, facilitating a more cohesive, effective and long lasting solution to point Europe towards economic recovery.