Wheels Come Off Euro Plan in Just Five Days

On Thursday of last week stocks across the world surged on news that EU leaders, attending their 7th heads of state summit in 2011 alone had agreed a new plan to tackle the debt crisis.

Photo: Bloomberg | Getty Imgaes

The details of the plan are well known and focus on recapitalization of Europe’s banks, 50 percent haircuts for Greek debt holders and the leveraging of the European Financial Stability Fund to 1 trillion euros.

Just five days later and the plan is already facing huge criticism and the market, fueled by the collapse of MF Global on Monday is showing Angela Merkel and Co exactly what it thinks.

Stocks in major euro zone banks are showing double digit losses after the Greek Prime Minister George Papandreou called for a referendum on the deal which would have significantly reduced his country’s debt burden in return for cuts in Greek government spending.

“We have faith in our citizens, we believe in their judgment and therefore in their decision. All the country’s political forces should support the (bailout) agreement. The citizens will do the same once they are fully informed” said the Greek Prime Minister on Monday.

The prospect of an angry Greek electorate voting down the latest EU deal is clearly a concern for investors and follows harsh criticism of the plan from all over the Greek political spectrum.

“The PM is under heavy pressure from his own party to step down and from the opposition to call for new elections” said Jan Poser, the chief economist at Sarasin in Zurich said following news of the referendum.

“By threatening a referendum, Papandreou takes a huge gamble. Faced with a stark choice between sovereign default and a EU rescue package, he believes that the people will give him the support” said Poser.

Poser believes the Greek leader is playing for high stakes.

“To save his own skin, Papandreou is obviously ready to take the Greek people to the abyss and to let them have a glance at the possible consequences of a sovereign default and a euro exit,” he said.

For those who hoped last week’s deal would allow the market to focus on some signs of a rebound from the US and this Friday’s jobs number there was more worrying news from Italy. Borrowing costs for the euro zone’s third largest economy continued to rise on Monday despite heavy buying from the European Central Bank.

“Yesterday we had one of the biggest ever days of peripheral sovereign bond buying from the Securities Market Program, with some banks estimating that over 5 billion euros of peripheral sovereign bonds were purchased via the ECB’s bond buying program in an effort to keep a lid on peripheral sovereign bond yields” said Mike Riddell, a fund manager at M&G Investments in London.

Despite much of this buying reportedly being directed at Italy, the spread over German borrowing costs kept rising to hit a new euro area high. With business leaders calling for Berlusconi to go and demanding a government of national unity, it could take his resignation to turn things around for Italy but despite reports he would go, Berlusconi remains in charge.

The collapse of MF Global had a lot to do with the price action over the last 24 hours as its trading rivals assessed their exposure and counter party risk. But just five days after yet another deal to solve the debt crisis, investors are again looking at a sea of red on their screens and huge losses for European banks. Not something Angela Merkel and her peers in the euro zone wanted to see so soon after their latest grand plan.