Some of my past posts highlight just how important a solution is to the European crisis. A solution might be on the way. Recently, French President Sarkozy said “We will recapitalize the banks… in complete agreement with our German friends.”
A key to such a step appears to be the holders of Greek debt taking a haircut (e.g. a bond has a face value of $100 and the investor accepts $80). Further, there also seems to be less certainty that Greece will stay in the Euro. Ultimately, there should be a plan delivered by early November at the latest.
Just how good last week’s news is will ultimately depend on the goal, strength, and the execution of that plan. I am unsure how much money is needed for recapitalization, how much Greece leaving the Euro will impact the global economy and markets as a whole, and what the implications of taking these haircuts will be.
However, the success of such a plan will depend on whether or not a PIIGS (Portugal, Ireland, Italy, Greece, Spain) fallout can be contained, if this is a systemic solution (i.e. not the banks), and if the plan can be applied a timely and effective manner.
“Contained” in this instance means preventing the credit markets from freezing up. As I have outlined before, if such a freeze up happens, it will likely spread to our markets.
In my opinion, this is the central overriding issue facing our markets through at least the end of the year. Let’s hope the plan is enough to prevent liquidity from drying up and punishes the imprudent while protecting the system.
