Finally, EU leaders have reached consensus on the European debt crisis. The measures announced in the deal aim at supporting the banking sector and stopping the Greek debt crisis from spreading to the whole Euro zone. The deal proposes various measures to solve the Greek debt crisis. Private banks will voluntarily write off 50% of their exposure to Greek government bonds. The deal sets 50% write-down on Greek debt. Other aspects of the deal include recapitalization of European banks and boost of $1.4 trillion (equivalent to 1 trillion EUR) to the European Financial Stability Fund (EFSF). The write-downs aim to bring Greece’s public debt down to 120% of Gross Domestic Product by 2020. The rescue plan for Greece is € 100 billion which aim to keep the country funded till 2014.
The European stock market reacted well to the news. On announcement of the deal, German DAX 30 index gained 3 % while French CAC 40 index and UK’s FTSE 100 index respectively rallied 2.8% and 1.7 % according to market reports by WSJ Matchwatch. The Stoxx Europe 600 Index surged 1.9% at trade open. The currency market also had it fair gain of the good news. The EUR soared against the USD to reach $1.4 for the first time since September. Asian shares and US futures also soared. Individual stocks that posted strongest gains across Europe were Societe Generale up 7.9%, Deutsche Bank up 8% and Barclays up 7.4 %.
The measures share fairly the debt to all stakeholders. Private bondholders are participating in the debt as much as governments. These concessions between private investors and the governments would help reduce the entire burden of the debt on the state and pressures on budget cuts. However the essential question is- Was the deal reached in hast to rebuild investors’ confidence and calm public agitations or to find long-lasting solutions to the debt crisis? My earlier article on the question of the European debt crisis, entitled “European Debt Crisis: Continuous Bailout Is Not The Answer”, suggests temporary suspension of debt threat members from the euro zone so as to allow flexibility in reviving these economies. I still stick to this view since the deal announced by the EU leaders neglects the fundamental problem facing the Greek economy and other EU debt threat members such as Italy, Spain, Ireland and Portugal. Growth is low in Europe and the global trend is nothing better. Europe economy is currently weak as its governments keep fighting recession and the future looks gloomy. Would Greece be able to satisfy its bailout terms and improve its macroeconomic indicators so as to ensure that it will not default again? Time will tell but I doubt Europe’s debt crisis is over.
Market rallies are the order of day anytime EU leaders announced major decisions to address Europe debt crisis. Thursday’s market day rally is probably another attempt by EU leaders to reassure investors and the public of a safe investing environment.
Looking forward to our economic and investment environment, the outlook is still negative as current trends are not different from past and future trends can’t be expected to be better. Short term market swings are right moments for trading. So look out for major news that would move the markets and play it safe as the likelihood of a bearish market ahead is high.
The winners of this current market rally would be those who can predict its end. Best trading strategy is going long European ETFs based on FTSE 100, DAX 30 and CAC 40 and shorting EUR/USD.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.