Futures are soaring overnight on news out of Europe that discussions have led to a “breakthrough” leading to “long-term union” (the USA Today reports):
“BRUSSELS (AP) – European leaders have agreed to use the continent’s permanent bailout fund to recapitalize struggling banks, and agreed to the idea of a tighter union in the long term.
The bank decision at overnight meetings in Brussels on Friday was aimed at helping Spain, which sought a €100 billion rescue to help its troubled banks and is facing rising borrowing costs.
EU President Herman Van Rompuy called it a “breakthrough that banks can be recapitalized directly.”
He said leaders of the 17-nation eurozone also agreed to a joint banking supervisory body.
He said the leaders of the full 27-member European Union agreed to a general long-term plan for a tighter budgetary and political union.”
Details are few at this point, but the bank recapitalization is a step in the right direction. It is beginning to feel very much like early 2009 as we piece together solutions (and hopefully avoid the worst case scenario involving Lehman 2.0). The bank recapitalization substantially reduces the risk of a broad credit crisis, but unfortunately does not help resolve the core issue, which remains the unworkable currency arrangement. So, we’re making baby steps in the right direction, but there’s much work to be done here. The endgame is still eliminating the solvency crisis at the sovereign level and that has to be done with some form of supranational entity or debt sharing arrangement. The good news out of these headlines is that it seems clear that full collapse of the Eurozone is rhetoric that is becoming increasingly scarce.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.