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Italian Prime Minister Silvio Berlusconi leaves the euro summit in Brussels (Yves Logghe)
Italian Prime Minister Silvio Berlusconi leaves the euro summit in Brussels (Yves Logghe)

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The euro deal: Greece's bliss, market's cheer, Italy's shame Add to ...

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The euro deal Will the euro zone deal be enough?

Many questions remain unanswered today, but for now the embattled leaders of the monetary union appear to have taken several steps in the right direction to easing the debt crisis that has plagued the region for about two years. Certainly the markets think so.

Leaders of the 17-member euro zone forged a broad agreement after a marathon session that ended in the early hours, as The Globe and Mail's Eric Reguly reports. The three main pieces of the package would beef up the union's bailout fund, force the region's banks to shore up their capital to the tune of €106-billion, and see the private holders of Greek debt voluntarily take a 50-per-cent hit, with the euro zone kicking in €30-billion to help out.

"The question is whether it will be enough in the long term, or whether it has merely put off the day of reckoning, for a little while longer," said CMC Markets analyst Michael Hewson. "While we now have some numbers to go on it will be all rather pointless of leaders don’t find a way to stimulate growth and we still have the question of Italy’s finances."

It is, of course, impossible to tell where all of this leads. As senior currency strategist Elsa Lignos of RBC in London put it, Europe's debt crisis is by no means solved.

First, the plan aims to bring Greece's debt-to-GDP ratio to 120 per cent by 2020, down from 160 per cent. "In practice that will be hugely dependent on the path of growth," Ms. Lignos said of the Greek economy, which is deep in recession.

As for the debtholders, they're looking at a writedown of €100-billion, and virtually all have to agree. "If some bondholders hold out we may need to see more than just the €30-billion sweetener of public euro zone money to get everyone on board," Ms. Lignos said.

As for whether bringing down the debt level to 120 per cent is enough, "Greek revenue growth prospects to finance a debt -to-GDP load in about 10 years that is comparable to Italy's ratio today are scant," warned Derek Holt and Karen Cordes Woods of Scotia Capital.

Key, too, is what the ratings agencies say.

"If S&P sticks to its guidance from earlier this summer, then it will stamp Greek debt in default by virtue of this deal having altered the original indenture terms for the worse," said Mr. Holt and Ms. Woods.

"That would not only shut Greece out of capital markets for years, it could also motivate rating agencies to take a more aggressive stance toward other heavily indebted nations given the European precedent that has now been set toward imposing losses on the holders of debts owed by profligate sovereigns," they said in a report today.

"Lastly, even a repeat remedial economics student would get that leverage is not without its risks. The EU is compounding leverage upon leverage here, just as the U.S. did with its housing market in the waning days of its boom. That worked wonderfully."

Where the banks are concerned, they'll now have to ensure a top capital level of 9 per cent by June of 2012. They're supposed to try to raise the capital through private means, and only go begging to governments if that doesn't work. And, as the European Banking Authority pointed out, banks can forget about dividends and bonuses if that's what it takes.

This, too, raises questions, as Stewart Hall, senior fixed income and currency strategist at RBC in Toronto, pointed out late yesterday.

"In the absence of the ability to tap private capital and a likely reticence to accept government and EFSF capital that may come with conditions, bank recapitalization threatens to become an exercise in burning off of assets," Mr. Hall said in a research note.

"For the EU economy – an economy that funds itself through its banks - it points to the potential for a credit crunch, deflation and a contraction in money supply getting layered onto already onerous growth challenges associated with Spartan-like fiscal austerity. Make no mistake, EU officials are fully aware of the potential. From today’s statement 'national supervisory authorities, under the auspices of the EBA, must ensure that banks’ plans to strengthen capital do not lead to excessive deleveraging, including maintaining the credit flow to the real economy.' Good luck."

And, finally, there are the weak links, where the statement from the euro leaders promised resolve, citing "an unequivocal commitment to ensure fiscal discipline and accelerate structural reforms for growth and employment." Of course, growth and employment will in part depend on how aggressively governments ensure that fiscal discipline, which is a big question here.

"Particular efforts are being deployed by Spain," the leaders said. "New strong commitments on structural reforms have been made by Italy. Portugal and Ireland will continue their reform programmes with the support of our crisis mechanisms."

Don't lose sight of Italy, where Prime Minister Silvio Berlusconi has been attacked for moving too slowly on its 120-per-cent debt-to-GDP level. The scandal-burdened Mr. Berlusconi, having been lampooned and in turn warning Germany and France not to preach to him, was forced to pen a letter promising to act.

The chief of the European Commission, Jose Manuel Barroso, took note of this, saying Italy did make welcome promises but noting that implementation is crucial and that "it is not enough to make commitments."

China not 'Good Samaritan' China welcomed the euro crisis deal as French President Nicolas Sarkozy prepared to phone Chinese leader Hu Jintao today to seek Beijing's help. And while China said it could help out, it will also promise so much.

Indeed, The Globe and Mail's Mark MacKinnon reports, Beijing warned that it “should not be seen as the EU’s Good Samaritans,” suggesting resentment at being asked to ride to the rescue of more developed economies than its own.

U.S. economy expands Markets have not only the euro crisis to cheer today, but also signs of a pickup in the U.S. economy.

Gross domestic product grew by 2.5 per cent in the third quarter, the best showing in a year. That's helping to dampen fears of a double-dip recession though still not enough to ease the U.S. jobs crisis in any meaningful way.

"So the economy grew, but will it be enough to create more jobs and lower the unemployment rate?," said senior economist Jennifer Lee of BMO Nesbitt Burns. "So far, no. But at least it appears that for those applying for unemployment insurance benefits haven't risen sharply."

Peter Buchanan of CIBC World Markets agreed: "After two disappointing quarters, the U.S. economy perked up in Q3, though not to a pace that is likely to see millions of recently unemployed return rapidly to work."

Markets rally Regardless of the outstanding issues in Europe, markets are rallying today, buoyed by hopes that the debt crisis is being handled properly amid fears it could derail the global recovery.

"Put on your rally caps, financial markets are surging after European leaders agreed on a plan to deal with the region’s debt crisis," said Benjamin Reitzes of BMO Nesbitt Burns.

Tokyo's Nikkei climbed 2 per cent, and Hong Kong's Hang Seng 3.3 per cent. In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were up by between 3.4 per cent and 6.1 per cent. North American markets followed suit, with the Dow Jones industrial average , the S&P 500 and Toronto's S&P/TSX composite all climbing.

"European markets have let out a collective ‘phew’ this morning and are currently trading positively across the continent," said Will Hedden of IG Index.

Currencies also reacted, pumped by some certainty.

"The package is not a solution to the European sovereign crisis but it does remove the immediate hurdles, which is encouraging," said senior currency strategist Camilla Sutton of Scotia Capital.

Earnings flow in Quarterly results from some of Canada's major companies are coming in fast and furious today. Here's a rundown:

Barrick Gold Corp. posted a 45-per-cent gain in third-quarter profit to a record $1.37-billion (U.S.) or $1.37 a share from $942-billion or 96 cents a year earlier.

"Q3 gold production was 1.93 million ounces at total cash costs of $453 per ounce and net cash costs of $328 per ounce," Barrick said. "The company is on track to meet its full year operating guidance, with production expected to be 7.6 million to 7.8 million ounces at total cash costs of $460-$475 per ounce, within original guidance ranges."

Nexen Inc. , in turn, posted a drop in profit to $200-million (Canadian) or 98 cents a share from $581-million or $1.11 a year earlier. Production after royalties slipped.

“While we have made good progress against several key initiatives so far this year, our production has been below our expectations due to the downtime at Buzzard,” said chief executive officer Marvin Romanow.

Potash Corp. of Saskatchewan marked a strong quarter, more than doubling its profit to $826-million (U.S.) or 94 cents a share from $343-million or 38 cents a year earlier.

“Although customers prudently managed inventory risk, the undeniable need for potash, phosphate and nitrogen ensured our products moved through the system to reach farmers around the world," said chief executive officer Bill Doyle.

Cenovus Inc. also posted a sharp jump in profit, to $510-million (Canadian) or 67 cents a share from $295-million or 39 cents.

“The company’s strong cash flow, coupled with our solid balance sheet, allows Cenovus to continue advancing development of our two existing oil sands assets, Foster Creek and Christina Lake, as well as pursue additional emerging projects that are expected to anchor Cenovus’s future growth," said chief executive officer Brian Ferguson.

Business ticker

In Economy Lab Bank of Canada Governor Mark Carney says central banks have been less than forthcoming in admitting that one of the primary aims of quantitative easing is to weaken their foreign-exchange rates, The Globe and Mail's Kevin Carmichael reports.

In International Business Shell used to be the drama queen among the oil majors. Now, Europe’s biggest oil and gas group by market value has become exceptionally and predictably profitable. The Financial Times reports.

In Globe Careers There are a lot of internal conversations getting verbalized that should stay right there in the comfortable recesses of a manager’s brain, Kristi Hedges of Forbes.com writes.

In today's Report on Business

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