Posted by: Andy Reinhardt on October 31, 2011
After the euphoric initial reaction to the breakthrough reached by European leaders on Oct. 27 to save the euro zone, analysts are casting a more skeptical eye toward the deal while investors are showing renewed anxiety.
The Stoxx Europe 600 Index soared 3.6 percent on Oct. 27 after European leaders concluded 10 hours of negotiations to announce a $1.4 trillion rescue fund and plans for banks to write down 50 percent of their Greek debt holdings. But morning-after doubts about the plan started to emerge on Friday, when the Stoxx index closed down 0.2 percent. The worries magnified on Oct. 31, as the Europe-wide Stoxx index and most national exchanges fell in the range of 3 percent or more.
At the heart of the concern is whether the newly-enlarged €1 trillion European Financial Stability Facility (EFSF) will be big enough to limit contagion to peripheral European nations other than Greece and whether members of the G-20 group of nations will be forthcoming in financial support for Europe.
As Scott Nixon points out in the Wall Street Journal Agenda blog, wrangling over collateral for debt swaps and Germany’s determination to limit its own losses (and those of the European Central Bank) leave unanswered who will ultimately pay for the euro rescue—especially if debt writedowns spread from Greece to Portugal, Ireland, or other indebted countries.
Bloomberg View takes an even stronger position. In an editorial called “Europe Might Have Blown Last Chance to End Its Crisis,” the authors say that Europe’s rescue plan, while moving in the right direction, remains too timid to address the crisis once and for all. “The magnitude is all wrong,” Bloomberg says, arguing that the EFSF alone may need to exceed €3 trillion.
The true long-term solution to ensuring the euro’s future likely requires giving European authorities more power over the fiscal affairs of member states—a politically fraught prospect that would require years of negotiation and complex new treaties. In the meantime, engineering orderly debt writedowns, beefing up bank capital, and strengthening guarantees are the only medicine Europe (and, by extension the G-20 and the IMF) can administer. On Oct. 31, investors voiced their concern that the latest cure still may not be strong enough.