Europe crisis plan could take months
NEW YORK - European leaders headed home from a weekend of meetings in Washington vowing bolder steps to address widening anxiety about the Continent’s sovereign debt burden, but it will most likely be weeks or months before any action comes to pass.
And that sets the stage for more pressure on stock markets, with crucial votes by European parliaments due this week on an earlier package to prevent defaults by Greece, Ireland, and Portugal.
Chancellor Angela Merkel of Germany drew parallels yesterday between the risk of a Greek default and the chaos that followed the 2008 collapse of Lehman Bros.
“We are doing it for ourselves,’’ she said in an interview aimed at persuading a skeptical German audience that setting aside billions to prop up shaky neighbors made sense. “Otherwise, the stability of the euro would be in danger.’’
All 17 member countries of the euro bloc must approve the rescue package, known as the European Financial Stability Facility. So far, six countries have signed off, but European leaders say the process should be complete by mid-October. Only after that do they seem likely to come up with a broader rescue package. What is not clear is whether the markets will give them that much time.
When the bailout was agreed to in July, worries centered on three smaller countries: Greece, Ireland, and Portugal. Since then, fears have multiplied about much larger Spain and Italy. The worry is that a default in Athens would threaten other sovereign borrowers, as well as banks in France and Germany that hold billions in Greek debt.
“The next three weeks are absolutely critical, and they can still stabilize the markets, but I wouldn’t tell my clients to put money to work until we see it,’’ said Rebecca Patterson, chief market strategist at J.P. Morgan Asset Management. “European policy makers have gotten well behind the curve. It’s not about the periphery anymore; it’s about the core, too.’’
A new indicator of market confidence will come as Italy sells bonds this week. Weak demand Sept. 13 sparked worries about the safety of Italian debt, which is a whopping $2.3 trillion, making Italy one of the world’s largest borrowers. Italy’s debt load equals 120 percent of gross domestic product. In Europe, only Greece is in worse shape, with debt at 150 percent of GDP.
In addition, the Greek Parliament must vote this week on a property tax increase.
“If that doesn’t go through and Greece can’t show it can move forward, it will be very difficult for anyone to give them more aid,’’ Patterson said.
Greece is also trying to show its austerity program is enough to qualify for an aid payment due in October.
Last week, anxiety about Europe led to the worst week for the Dow Jones average since the financial crisis in 2008. Besides the 6 percent drop on Wall Street, investors are concerned about the continuing rout in European stocks, especially bank shares. In another troubling echo of 2008, traders abandoned former havens like gold and oil, preferring the safety of US Treasury securities or cash.