The Chancellor of the Exchequer and stock markets have welcomed the decisions made by European leaders last night, but banking analyst Ian Gordon of Evolution Securities begs to differ. Calling the bank recap plan "weasel words from Brussels", he says: European bank overcapitalization remains an aspiration rather than a reality, and it is crystal clear that the Europeans have no intention of ever signing up to the sheer excess that the UK regulatory metters foist upon our own banks. The commitment to “a significantly higher capital ratio of 9pc” to create a “temporary buffer” is pretty lame, and has deferred implementation. We may not see the full “targeted” €106bn raised in the next 8 months. • The firepower of the EFSF bailout fund will be increased to $1.4tn (€1tn).
• Banks agree 50% writedown in the face value of Greek government bonds.
• Athens will be handed a new €100bn bailout early in the new year.
• Bank recapitalisation - banks required to hold up to 9% of tier 1 capital by June next year, with a figure of €100bn mooted.
Michael Hewson, market analyst at CMC Markets, said: 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. 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. Given that the extent of private sector involvement for Greek haircuts has finally been agreed at 50% it is difficult to estimate how EU leaders arrived at the figure of €100bn, which seems rather low, given the 50% amount agreed.
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The immediate reaction in much of the rest of the world is likely to be a measure of relief. In Washington, The White House has become ever more exasperated with European summits and communiques that are short on detail. Austan Goolsbee, until recently one of the top advisers to President Barack Obama, said last night that Americans have been piling up the sandbags and waiting to see how much water comes over the top from Europe.
Fears over the state of Europe's undercapitalised banks has been central to the woeful performance of US banking shares over the summer, while many US companies have cited Europe as their single biggest concern at the moment. But there's only likely to be cautious optimism in the US and that will need to be cemented by more details and, critically, execution of the plan by European governments.
Mark Carney, the governor of Canada's central bank, said yesterday that European leaders must make clear to everyone that one communique is not going to solve a crisis that was brewing for years and will take years to fix. But this plan does, from initial impressions, look Europe's most credible effort yet to lance the Greek boil and strengthen the continent's banks for the first time since the financial crisis of 2008. Americans, after all, have plenty of their own economic problems to fix.
Italy's powerful trade unions voiced outrage on Thursday at pledges given by the prime minister, Silvio Berlusconi, to the EU, but held back from calling a general strike.
Responding to pressure from the German chancellor, Angela Merkel, and French president, Nicolas Sarkozy, Berlusconi promised to make it easier for firms in economic difficulty to reduce workforces. In a letter to Brussels before Wednesday's summit, he said his government would approve the legislation by May next year.
Berlusconi's chief ally, Umberto Bossi, implied that the finance minister, Giulio Tremonti, had refused to endorse the letter, which included a €15bn (£13bn) programme of asset sales and an undertaking to raise the standard retirement age to 67. "Tremonti slipped away," Bossi said.
The finance minister has imposed strict discipline on Italy's public finances. But he has come under fire for failing to find ways to encourage growth in the economy – badly needed if Italy is to meet its targets for reducing its budget deficit and €1.8tn public borrowings. The IMF forecast last month that Italy's GDP would rise by only 0.3% next year, a full percentage point lower than it predicted in June. From Brussels, the European commission president, Jose Manuel Barroso, said it was "imperative for Italy to firm up [its] commitments and do so with a clear timetable".
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