Author: KHALIL HANWARE | ARAB NEWS
Monday 31 October 2011
Al-Jasser, speaking at a financial forum in Kuwait on Monday, was reported by Reuters as saying that the summit of European leaders last week had sent an important message to markets that the leaders had reached a decision-making phase.
Jarmo T. Kotilaine, chief economist at the National Commercial Bank, too concurred with Al-Jasser’s assessment, stating that there clearly is a strong political will in Europe to prevent a deterioration of the situation and a descent into a full-blown crisis.
“Last week’s summit resulted in the most candid assessment to date of the crisis,” Kotilaine said, “in particular: 1. There was an overdue agreement on a 50 percent haircut for private holders of Greek sovereign debt. This is far more than the 20 percent figure discussed in the summer and should reduce the debt burden facing Greece.
“However, its ultimate benefits may prove fairly limited, not to say mixed, as it will not only engender economic losses, it will also make credit insurance redundant.
“2. The need to recapitalize European banks was formally recognized and a deal on 106 billion euros of capital raising was agreed. The new plan mandates a minimum core capital requirement of 9 percent of assets after write-down of sovereign debt to be enforced by the end of next June.
“This is sharply up from the 5 percent used previously and should boost confidence in the banks’ ability to weather the sovereign debt storm. The leaders also asked the European Central Bank, the European Investment Bank, and other agencies to ‘urgently explore’ a system of guarantees that would reduce the dependency of European banks on short-term loans.
“3. There was an important agreement to boost the resources of the Financial Stability Facility from 440 billion euros to 1 trillion euros, which is essential so as to credibly assuage contagion fears.
“In spite of the seeming progress, this result falls far short of the ‘comprehensive solution’ that had been called for by many European leaders before the crisis. Important questions still pertain to the scale, effectiveness, and implementation of these measures. Nonetheless, the progress made in assessing and addressing the problem is significant and has freed Europe from the crisis management mode for now. Even though the incremental approach being pursued means that this is unlikely to be the last EU crisis summit, it should reduce the near-term market pressure and prepare the ground for further corrective action in the future.”
However, Paul Gamble, head of research at Jadwa Investment, said: “The key problems facing the global economy are the lack of economic growth and rapidly rising government debt, which is feeding into major stresses in the banking sector. At the center of these tensions is Greece.
“Although Greece is only a small economy, many banks in the euro zone hold Greek debt. The risk of a Greek default has caused major stress for some euro zone banks and as euro zone banks are reliant on wholesale markets for 60 percent of their funding, they are very vulnerable if other banks are not comfortable lending to them. Unless Greece’s debt burden is reduced it will be very difficult for its economy to grow,” Gamble said.
The agreement at the euro zone summit last week calls for a larger write-down of the value of Greek debt in exchange for more reform and at the same time providing additional capital for euro zone banks to offset the impact of the fall in the value of their holdings of Greek debt on their balance sheets, he added. “It also gives more ammunition to support the economies of other member countries by increasing the funds available for the purchase of their debt. This has reassured investors, but there are still some concerns about the political will to implement the deal and many details still need to be decided,” Gamble said.