So, What’s Next For The Eurozone?
Friday, October 28, 2011
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Following the announcement of the highly anticipated European Summit resolution, many in the market are asking the same question: what next?
European leaders took days to craft a plan that, for all intents and purposes, will likely create a temporary pause in all the market gloom. The problem now is the execution part of that plan.
Policymakers will first have to deal with bank recapitalization implementation. Under the new proposed measures, major Eurozone banks will be required to increase tier one capital – or a bank’s financial core – to 9%. This isn’t that far off of where they stand now. European banks on average maintain a 6-7% tier one rate. But, the 9% upgrade still falls short of US banks’ core capital ratios of 10% on average and money market rates are still high – making cash funding somewhat inaccessible. With funding extremely difficult to garner in this type of credit environment, it should be interesting to see if zone banks are even able to meet the base requirement on their own before turning to the European Financial Stability Facility for assistance.
And then there’s Italy.
Market speculators have always believed that either Spain or Italy was the next Euro member to go – after the other peripheral nations. The probabilities have shifted in the direction of Italy, even as Spain’s economy has had to deal with rising issues like unemployment and poor productivity. Still, it’s Italy that carries one of the world’s largest debt load – estimated to be around 120% of the country’s growth. As such, it falls to Italy’s Prime Minister Silvio Berlusconi in convincing European leaders that they can count on an Italian no-default scenario.
But, it’s not going to be easy. Already Berlusconi has promised to trim about 55 billin euros from the country’s budget, while promoting economic growth and dealing with extremely high opposition to raising pension ages. Both Greece and France have recently dealt with the item – against high public disdain and resistance. The same is likely to happen during Berlusconi’s administration, making the overall healing process for the Eurozone even slower, if feasible at all.
But, most importantly, European leaders may have to deal with additional backstop funding. Although 1 trillion euros ($1.4 trillion dollars) isn’t a small sum of cash, it still lacks the breadth of the US’s some $2.5 trillion or so in backstops, guarantees and monetary stimulus that has been implemented in the last several years. This means that zone leaders will need to turn to the likes of China and the International Monetary Fund for additional funding channels as well as guaranteeing the current amount. With other BRIC sovereigns looking to join the short list of creditor possibilities, financiers will want to see some guarantees of their own – through debt term structures and higher rates of return. But, mutually beneficial rates may be a bit too high for now, placing Eurozone leaders back at square one.
So, it should be interesting to see if the proposed measures by European leaders will go off without a hitch. Although bumps along the road can be expected, financial markets are likely to get crushed if it seems that there are significant holes in the plan. But, if EZ policymakers can overcome these concerns, look for the region to remain intact for now.
Source : http://forexalliance.com
European leaders took days to craft a plan that, for all intents and purposes, will likely create a temporary pause in all the market gloom. The problem now is the execution part of that plan.
Policymakers will first have to deal with bank recapitalization implementation. Under the new proposed measures, major Eurozone banks will be required to increase tier one capital – or a bank’s financial core – to 9%. This isn’t that far off of where they stand now. European banks on average maintain a 6-7% tier one rate. But, the 9% upgrade still falls short of US banks’ core capital ratios of 10% on average and money market rates are still high – making cash funding somewhat inaccessible. With funding extremely difficult to garner in this type of credit environment, it should be interesting to see if zone banks are even able to meet the base requirement on their own before turning to the European Financial Stability Facility for assistance.
And then there’s Italy.
Market speculators have always believed that either Spain or Italy was the next Euro member to go – after the other peripheral nations. The probabilities have shifted in the direction of Italy, even as Spain’s economy has had to deal with rising issues like unemployment and poor productivity. Still, it’s Italy that carries one of the world’s largest debt load – estimated to be around 120% of the country’s growth. As such, it falls to Italy’s Prime Minister Silvio Berlusconi in convincing European leaders that they can count on an Italian no-default scenario.
But, it’s not going to be easy. Already Berlusconi has promised to trim about 55 billin euros from the country’s budget, while promoting economic growth and dealing with extremely high opposition to raising pension ages. Both Greece and France have recently dealt with the item – against high public disdain and resistance. The same is likely to happen during Berlusconi’s administration, making the overall healing process for the Eurozone even slower, if feasible at all.
But, most importantly, European leaders may have to deal with additional backstop funding. Although 1 trillion euros ($1.4 trillion dollars) isn’t a small sum of cash, it still lacks the breadth of the US’s some $2.5 trillion or so in backstops, guarantees and monetary stimulus that has been implemented in the last several years. This means that zone leaders will need to turn to the likes of China and the International Monetary Fund for additional funding channels as well as guaranteeing the current amount. With other BRIC sovereigns looking to join the short list of creditor possibilities, financiers will want to see some guarantees of their own – through debt term structures and higher rates of return. But, mutually beneficial rates may be a bit too high for now, placing Eurozone leaders back at square one.
So, it should be interesting to see if the proposed measures by European leaders will go off without a hitch. Although bumps along the road can be expected, financial markets are likely to get crushed if it seems that there are significant holes in the plan. But, if EZ policymakers can overcome these concerns, look for the region to remain intact for now.
Source : http://forexalliance.com
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