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Markets Like Weekend Summit Progress

Posted by: Andy Reinhardt on October 24, 2011

I had Sunday roast yesterday with a friend who happens to be a hedge fund manager here in London. (Both he and his firm shall remain nameless to protect a private discussion.) I would characterize his level of pessimism about the European debt crisis as very high. He thinks most European banks are broke and that politicians don’t have enough spine to take the really tough steps needed to resolve the situation.

With foreboding in his voice, my friend declared that the outcome of the weekend summit among European finance ministers would determine the direction of the market on Oct. 24 and beyond. “They have to come up with something big,” he said.

Something big they did not, though commentators agreed progress was made towards a complex end game involving a mix of voluntary (or coerced) Greek debt writedowns and bank recapitalization. Alessandro Leipold, chief economist of the Lisbon Council, a Brussels think tank, and former acting director of the International Monetary Fund’s European department, told Bloomberg TV that he found the length of the meeting to be a “positive sign.”

Markets seemed generally soothed, at least for the time being. Major European exchanges closed up by 1 to 1.5 percent on Oct. 24 and U.S. indices were up at mid-day. But the real test comes later in this week, when government leaders meet Oct. 26 to hammer out more details of their $1.4 trillion bailout plan prior to the G-20 summit in Cannes starting Nov. 3.

No cataclysm yet. But if European leaders kick the ball into the long grass once again, my hedge fund friend’s dire vision could still play out.

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Financial markets are on the edge as investors await a solution to the European debt crisis. This blog examines the banks that hold billions of euros worth of Greek, Italian, and other sovereign debt; the governments that must pay off or refinance that debt; and the implications for the worldwide financial system if they can't.

Analyses or commentary in this blog are the views of the author and or commentators, and do not necessarily reflect the views of Bloomberg News.

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