Euro Finance Ministers meeting cancelled but political meeting still set for Wednesday--I think this is progress
10/25/2011 1:21 pm EST
First, this morning the meeting of European Union Finance Ministers scheduled for Wednesday was cancelled. But the meetings of the political leaders of the 27 European Union countries and of the 17 EuroZone countries will go ahead as scheduled tomorrow.
You’re entitled to go “Huh?” at this one. My interpretation is that the technical details of the deal haven’t been worked out yet—hence the cancellation of the Finance Ministers meeting—but that it looks like the politicians may be able to present the outlines of a plan on Wednesday. After that the Financial Ministers would meet—a day or two later, according to Eurogroup President Jean-Claude Juncker—to complete the package.
Second, Reuters is reporting agreement on two options for leveraging the $600 billion European Financial Stability Facility with the details to be left to EuroZone Finance Ministers. This means that both ideas floated recently—a plan to leverage the facility by using it to insure bondholders against the first 20% of their losses and a plan to create a special purpose vehicle that would let countries outside the EuroZone invest in bonds issued by the facility—are going to be part of the final package.
Third, Reuters is also reporting that the International Monetary Fund is considering participating in a special purpose vehicle set up by the EuroZone to leverage the financial strength of the $600 billion European Financial Stability Facility. “Considering” is such a wonderfully vague term, but in this context I think it’s actually a positive since earlier reads were that the IMF would not participate.
Fourth, we do have some sense of the sticking points. For example, banks and EuroZone governments are still negotiating over the size of an expanded haircut with banks arguing for a 40% write down in the value of their Greek debt and EuroZone leaders arguing for 60%. (I wouldn’t be surprised to see them split the difference at 50%. Remember the July deal called for a 21% write off.) Also there’s agreement that banks need to increase their capital levels, but no agreement on how big an increase to require or when. Initial proposals have called for European banks to raise just $140 billion in additional capital by June. Those proposals have drawn scorn from the financial markets because $140 billion is at the low end of estimates of how much capital European banks need to raise and because June is seen as too far away.
The financial markets have reacted to all this with a calm that says all traders think this chaos is a sign that there will be a deal. The French CAC 40 Index closed down 1.4% and the German DAX Index was down 0.1%. In the United States as of 12:30 the Dow Industrial Average was down 0.7%, the Standard & Poor’s 500 Index was down 0.9%, and the NASDAQ Composite was down just 1% on average to light volume.
Those are very modest declines considering the explosive advance yesterday.