Risk appetite returned to the markets today as investors felt a breeze of confidence from the EU crisis summit . The calming words from Mr. Barroso were the catalyst for a return to riskier assets for traders who had resigned themselves to a winter of hiding in the low yielding, but safe, US dollar. On the back of a much more robust-sounding, if structurally weak, plan to deal with the regions banks and debts the Euro and Australian dollar rose sharply and ended the day looking decidedly over-bought.
The good news for investors came in the form of a pledge to expand the regions bail-out mechanism to around one trillion Euros. This mind-boggling amount of cash is not particularly useful in addressing the underlying concerns of many national economies but it will at least prevent future defaults and other symptoms of the low-growth period that Europe has entered and looks to stay in for the immediate future. Some analysts argue if this will even be enough to help larger struggling economies but it is a marked improvement from the 440 billion which had initially been pledged. The focus on containing the debt problem seemed to strike a positive chord with investors who have increasingly been aware of the potential of both Italy and Spain being dragged down as Greece has been in recent months.
Furthermore, the agreement that the banks would absorb 50% losses on Greek debt sounded as though this particular case, which at one point had threatened to cause a break up of the single currency, was being addressed directly rather than gently. The question as to whether these developments will allow Greece to break free from debt in the coming months and years remains to be seen, but it is clear that at the very least, Europe has bought itself some time to try to resolve the underlying issues of multiple debt crisis.
The emergence of an unlikely comic book hero to save the region was also announced today with the purpose to focus on the euro and offer additional powers to the commissioner. This ‘super commissioner’ will play a prominent role in monitoring and supporting the role of the commissioner and, although his name suggests that he or she will save the day details are still very vague in regards to the precise role and what extra powers they will have in regards to the euro.
The mainstay of the agreement was focused on the recapitalisation of banks in order for them to be able to withstand losses from government debts. Although this is certainly addressing one of the many underlying factors in the instability of the Eurozone, it ironically may require governments to help the banks reach their 106 billion recapitalisation target by June 2012. In times of austerity, national protests against government inability to stimulate jobs and the potential for a recession, it is hard to imagine that national governments bailing out banks in order to conform to this package will be easily accepted.