Europe finally getting their act together

To be honest, after so much recent dithering by the European leaders, I was not expecting that much from this emergency summit. But I think the threat to Italy and potentially other countries have finally shaken them enough to get their act together. They have just announced a 109 billion Euros bailout package deal for Greece. More importantly, the 440 billion Euro rescue fund which was established last year was given broader powers to help prevent the debt crisis from spreading further. Also, the bailout package allows Greece to roll over maturing debt and pay a lower interest rate on its loans, and private investors will be required to take some losses for the Greek debt they hold.

This is effectively a restructuring, but somehow, it will be a restructuring without necessarily being called a credit event, or a default. Also, they are finally getting together to act in concert as they give much broader powers to the 440 billion Euro rescue fund. In return, it is a given that countries which are financially weak will be scrutinized much more closely and asked (if not forced) to get their house in shape.

While I hesitate to say that this will at once solve all of Europe’s debt problems, it is a good start. The crucial thing is that after weeks of wrangling, Europe is finally coming together in agreement to find a joint solution to this. Right now, the fears over Europe’s debt crisis is probably the single biggest sword hanging over investor’s heads which has resulted in the large swings in stock markets in recent weeks. The sense that European leaders have finally set aside their individual agendas to act for the common good of the whole of Europe will give markets a big confidence booster.

In the weeks to come, if investors can see that Europe is serious about coming together to tackle its debt crisis, we will see a shift in investor sentiment. There may be a substantial rerating of European equities. Not just European equities, US and Asian equities are also relatively cheap at the moment while earnings remain strong. I have been saying that I believe the second half will see a substantial rebound in stock markets globally. This give me even greater confidence now that this will happen. The upcoming months will be an interesting one.