Who needs to wait for formal announcements of a European plan to deal with the region's debt crisis? Tuesday's tentative stock market rebound turned into a bullish rush in afternoon trading, all because The Guardian reported that EU diplomats said that the European bailout fund would be raised to €2-trillion, a huge boost from the current size.
The report comes days ahead of a Sunday summit among European leaders to announce a plan, and suggests that leaders are coming to grips with the severity of the crisis and the need to act in unison after months of dithering. As the Guardian noted, it also comes as Moody's Investors Service warned France that the cost of the crisis – and bailing out the country's banks, in particular – could threaten its triple-A credit rating.
According to The Guardian, the new agreement would take two forms: "First, the main bailout fund, the European financial stability facility, will be given additional levers enabling it to offer first-loss guarantees for bondholders, be they private or public. Senior diplomats say this will deliver a fivefold increase in the fund's firepower – giving it more than €2tn compared with the current €440-billion lending capability. The EFSF will in effect become an insurer, thereby overcoming European Central Bank resistance to the idea of turning into a bank.
Second, Berlin and Paris have agreed that Europe's banks should be recapitalized to meet the 9 per cent capital ratio that the European Banking Authority is demanding after its re-examination of the exposure levels of 60 to 70 "systemic" banks. The EBA has marked these exposures much closer to current market values."
Stock markets have reacted with glee. With the trading day ticking down, the Dow Jones industrial average was up more than 180 points or 1.6 per cent, a 280-point swing from its morning low.
David Berman