Well, it has been a long time coming and, it could be argued, should have happened months ago, but a deal has been done which should put a bottom under the sovereign debt crisis in Europe – for a while at least.
European Union leaders have agreed a deal where the EU bailout fund will be extended to €1 trillion. This should be enough to restore confidence to the markets that a “domino style” sovereign debt contagion can be averted within indebted Eurozone countries (notably Spain and Italy). The banking sector has had to agree to potentially “taking a haircut” on bad (Greek) sovereign bonds which they hold to the tune of 50% – up from an earlier figure of 20% in the event of a default. They will also have to raise an additional €100 billion in liquid assets to help reassure the markets that they would be in good shape to weather any additional financial storms which may come their way.
The deal should see the Greek debt reduced to 120% of the nation’s GDP by 2020 (it currently stands at 160%).
The reaction of European markets has been little short of ecstatic: by mid afternoon, the Frankfurt Dax was up by 5.4%; the Paris CAC by 6.15 and the London FTSE by 3.4%. The banking sector has seen the strongest gains. Credit Agricole shares rose by 21%; Societe Generale saw a 16% recovery; Barclay’s rose by 13% and Deutsche bank by 15%.
The Euro has strengthened on the news, breaking through the $1.40 mark. At the time of writing EUR/USD stands at 1.4133 a gain of 0.0229 on the day. The real test will come once the euphoria wears off and when the reaction to the potential write-down comes from the ratings agencies.