Eurozone Policymakers Deliver Long-Anticipated Debt Crisis Plan
- There was a rising tide in risk assets on Thursday, October 27, after a deal emerged from the Eurozone summit which addressed several of the key concerns that have plagued the region. The plan included a European bank recapitalization program, a framework for Greece to restructure its sovereign debt, and an enhanced financial backstop.
- Specifically, a 50% voluntary haircut was applied to financial sector bond holders of Greek government bonds to avoid a more disorderly restructuring. Meanwhile, the bank recapitalization program will require Eurozone banks to meet a Tier 1 capital ratio of 9% by the end of June 2012.
- While the bold plan to address the crisis assuaged near-term fears of greater contagion, we believe both the Eurozone area and the U.S. economy remain in a fragile state as consumer deleveraging continues.
- We believe heightened volatility may likely persist in the months ahead, given the prospects for slower growth, the persistently poor employment situation, the increasing focus on the debt “super committee” report, and 2012 election.
Based on the tendency for European policymakers to over promise and under deliver, the bar for a meaningful policy response coming out of the recent Eurozone summit was low. As such, we were pleasantly surprised to wake up on Thursday morning to find that European leaders were able to reach agreement on a plan to take the first step to address the European debt crisis. By no means are we – or anyone else – saying that Europe’s issues have been solved, as this will be a process that takes years to fix. However, it is encouraging to see policymakers step up and deliver a comprehensive plan that begins to address the Eurozone debt crisis, especially considering the relatively weak economic backdrop and the fragile state of confidence. The initial market response to the measures has been very positive as well, with both domestic and international equities rallying and bond spreads in peripheral Eurozone countries falling.