Over this past weekend, the International Monetary Fund (IMF) and G-20 leaders met in Washington, and the main focus was the deepening financial crisis in Europe. Leaders from around the world called on the stronger nations of Europe to “leverage” their emergency bailout fund, the European Financial Stability Facility (EFSF), by up to trillions of euros if necessary.
While none of the G-20 leaders will confirm what follows, it is widely believed that a new three-part plan was introduced at the weekend meeting to address the growing debt crisis in the eurozone: 1) increase the EFSF to at least €2 trillion; 2) recapitalize eurozone banks by at least €150 billion; and 3) allow Greece to default on 50% of its debt.
Since July 19, I have maintained that the European debt crisis would dominate financial markets around the world. Since then, we’ve seen the Dow and the S&P 500 plunge by nearly 20% at the low point. However, the global equity markets rallied strongly on Monday and again today on hopes that the new bailout plan hatched over the weekend will stem the crisis in Europe.
It is interesting that Europe is preparing to go down a similar path as the US took in 2008 – huge bailouts and a possible Euro-TARP to restructure its ailing banks. The hand of Tim Geithner is all over this one. I hope it turns out better for Europe, but I am not optimistic.