European leaders finally agreed on a trio of measures to try to bring the eurozone crisis to an end last night.
Investors around the world gave a nod of assent, buying shares and pushing up markets. In the US the Dow gained 162 points, or 1.39%, to 11,869, while the S&P 500 Index rose 13 points, or 1.05%. European and Asian markets made similar gains, with the FTSE 100 up 1.82% or 101 points at 5,654.
The euro summit produced a 15-page document including a raft of measures, with the final details hammered out in the early hours of this morning, but the triple resolution forms the core of the deal.
Although the initial response has been positive, there is little doubt that much remains to be done.
1. Boost the banks
The plans for banks contained no big surprises. European banks will have to increase Tier 1 capital ratios to 9% until 30 June 2012, compared with the Basel III target of 7% for the same period. If they do not achieve the new ratios they could be ‘subject to constraints regarding the distribution of dividends and bonus payments’.
‘Looking at latest earning reports from banks and the July stress tests, this new target should be achievable for most banks,’ said Carsten Brzeski of ING.
The summit agreed that banks should first try to use private sources of capital.
‘If this is insufficient, national governments should step in and the EFSF should only be the lender of last resort for bank recapitalisation,' Brzeski said.
But Michael Symonds of Daiwa Capital Markets said the recapitalisations were largely irrelevant and could even be destabilising ‘if market participants don't consider that the broader plan has killed off concerns that the Greek tragedy is merely the precursor of a wider euro area sovereign debt restructuring’.
And Douglas McWilliams, chief executive of the London-based Centre for Economics and Business Research, warned the banking recapitalisation could mean handing banking system over to Asian and Middle Eastern investors. ‘In practice this can only come from restricting lending, which will exacerbate the growth slowdown, or from Asian and Middle East investors who will have a buyers’ market and will probably end up owning the bulk of the European banking system as a result.’
The 9% plan compares with a 10% buffer that Britain's banks must by 2019 hold under the Independent Commission on Banking's proposals. 'Let’s be clear – European bank recapitalisation 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 nutters foist upon our own banks,' said Ian Gordon of Evolution Securities.
