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Germany approves new powers for the euro debt facility--now onto the hard work
09/29/2011 12:03 pm EST
The vote—523 in favor and 85 opposed—was on a measure to enable the facility to buy troubled government bonds in the secondary market and to offer precautionary credit lines to banks. It also increased Germany’s guarantees for the facility to 211 billion euros from 123 billion. In the end enough of the parliamentary members from Chancellor Angela Merkel’s collation voted in favor to give her a so-called “chancellor’s majority.” That means the measure would have passed even without votes from the opposition and that Merkel will not have to call for early elections.
The market’s reaction has been positive but somewhat muted, that is, it looks like we’re unlikely to recover all of yesterday’s lost ground. As of 11:30 a.m. New York time, the German DAX Index was up 0.93%; the French CAC Index had climbed 0.9%; and the Spanish IBEX 35 Index was ahead 1.03%. In the United States the Dow Jones Industrial Average was up 1.53% and the Standard & Poor’s 500 1.04%.
Why no dancing in the streets?
Two reasons, I think.
First, the positive result had been widely signaled in straw votes over the last week. The only question was the margin of victory. The markets largely anticipated this result—although, after yesterday’s explosion of uncertainty, it is still appreciated.
Second, while the German vote assures that the 17 EuroZone countries will all approve this limited expansion of the powers of the European Financial Stability Facility, no one is under any illusion that this by itself will end the euro debt crisis or prevent a Greek default. The European Financial Stability Facility is, at 400 billion euros, way to small to provide a credible guarantee against the spread of the crisis to Italy—and preliminary efforts to leverage the fund’s financial power have already proved contentious. These measures also won’t prevent a Greek default that is rooted in a lack of global competitiveness in Greek corporations and a steadily shrinking economy. More cuts won’t make the Greek economy grow and European governments are clearly not going to throw more cash at Greece indefinitely (or maybe even beyond the end of 2011.) Greece needs debt relief beyond the 21% haircut on Greek bonds suggested by the July 21 agreement, but even the suggestion of increasing the pain imposed on banks has run into strong opposition from the French government and the European Central Bank. And even without that opposition, it’s pretty clear that the banks will refuse to participate in a voluntary haircut beyond 21% and any attempt at imposing a bigger discount on Greek debt would trigger a default, Standard & Poor’s has said.
So a No vote today would have been very bad news but the Yes vote just really clears the deck for the hard work that no one is confident EuroZone politicians are up to.
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