Thursday, October 27, 2011

SET gains 2.29% as Europe agrees Greek deal

The Nation October 27, 2011 9:04 am
SET gains 2.29% as Europe agrees Greek deal

The Stock Exchange of Thailand rallied today, on good news that European leaders reached a number of measures to ease the financial crisis.

As of 4.40pm, the composite index gained 21.49 points or 2.29 per cent to 960.17 points, despite escalating water level in the capital city of Thailand. Turnover was Bt30.2 billion. All Asian stocks jumped today on the good news.European leaders successfully persuaded bondholders to take a voluntary haircut of 50 per cent on Greek debt and expanded the eurozone rescue fund to 1 trillion euros ($1.4 trillion).

International Monetary Fund Managing Director Christine Lagarde welcomed the steps taken today by the Eurozone leaders toward establishing a comprehensive framework to address the crisis facing the region. In a statement, she said she was encouraged by the substantial progress made on a number of fronts.

On Greek debts, the leaders agreed to involve private sector in the solution for burden sharing. Bondholders agreed to a voluntary haircut of 50 per cent on Greek debt aiming for a debt/GDP ratio of 120 per cent by the end of the decade.

"More immediately, I intend to recommend approval to the IMF’s Executive Board of disbursement of the next tranche of our loan under the current programME. The continued commitment of the Greek authorities to implement agreed economic reforms remains, of course, paramount.

The leaders also expanded the capacity of the European Financial Stability Facility (EFSF), including through the use of new Special Purpose Vehicles (SPVs).

To Lagarde, this can strengthen Europe’s defenses against contagion and help ensure the proper functioning of the sovereign debt market. In the period ahead, it will be important to detail further the modalities of how this enhanced EFSF will operate and deliver the scale of support envisaged.

There is also a compulsory increase of 106 billion euro of bank capital and an unified approach to guarantee bank bonds to support senior unsecured term funding markets.
"Restoring growth depends on a financially sound banking sector and reinforcing the banks’ capital buffers is key. This should be achieved mainly through the provision of additional capital and not by lower lending within or across countries," Lagarde said

According to Barclays Capital, warm welcome by the markets is not surprising. But this is merely a relief rally rather than the start of a prolonged period of outperformance of European and cyclical currencies due to four mail reasons.

First, there remain significant uncertainties. We do not know a lot of the details, these measures may need to be agreed by national parliaments, the bank capital needs to raised and we will not know how much will come from the private sector, and therefore how much will need to be financed from governments and the EFSF for some time.

Second, the negotiations demonstrated the deep differences between countries and different interest groups. This was inevitable but given the extreme ongoing difficulties facing the euro area economies they are likely to come back into focus from time to time. Politics is a fractious business even on a week-to-week basis and, at best, the resolution of the problems will take years.

Third, linked to that, the agreement helps stabilise the symptoms of the problems. The underlying causes are even more difficult to address. Structural reform measures have been announced to some extent in the peripheral economies, but most still need to be put in place. The ability of the euro area as a whole to monitor individual states’ fiscal plans remains limited. And the basic requirements of a currency area - a reasonably homogenous economy, flexible markets for the factors of production (especially labour), and fiscal flexibility - are not in place and will take a long time to establish. These are all long-term issues, but long-term issues have to have effects in the short term at some point, and they all matter for the current situation.

Fourth, even if confidence increases as a result of the agreements already announced and the information that we will presumably get over the next few weeks, euro area growth looks likely to be extremely weak. The weaker it is, the harder it will be to sort the problems out, and the looser ECB policy is likely to be.
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