27 oktober 2011
The announcement of a €1 trillion plus package to solve the financial crisis in Europe has been greeted favourably by markets with both equities and the euro itself rising. It certainly seems to have gone a long way to meeting market desire for something more comprehensive than the piecemeal approach we have encountered over the last couple of years.

At first glance the EU authorities seem to have succeeded in walking the tight rope between reducing Greece's debt burden in sufficient size to make their position within the euro more sustainable, and insufficient size to place an untenable burden on recapitalisation plans for the European banking system. Indeed financial sector debt markets have recouped a substantial portion of the lost ground.

Whilst a lot of the detail is still to be determined over the coming weeks, and there remains scope for non-euro countries to provide more capital whether through IMF participation in any vehicle linked to the European Financial Stability Fund (EFSF), or direct involvement of individual countries, one thing strikes as curious. The stabilisation of sovereign debt markets relies on the employment of leverage as a solution. We query the wisdom of this.

One thing European politicians and policy makers have excelled at since the 2008 financial crisis is buying themselves more time. Whether it was the large scale, but temporary liquidity provision implemented in the immediate aftermath or the policy measures agreed last night in Brussels, Europeans seem intent on limiting the capital commitments they make for an issue of solvency and not liquidity.

Solvency is in fact the core of the problem, and whilst we expect markets to be jubilant as we enter the new year, questions remain as to the longer term solvency of some peripheral eurozone countries. The dislocation in euro-zone money markets that we have witnessed over the past three months may already have done grave damage to the growth prospects for the region next year, and we expect the release of economic data to be scrutinised heavily as we work through the first part of 2012. Austerity is still required as a condition of the support received at an EU level, and the danger must be that when several countries tighten fiscal policy simultaneously, it may have an overbearing impact on the growth trajectory of the euro-zone economy. Should the threat of recession become more real, markets may react quite differently to their current optimistic state, as investors question once again the sustainability of the single currency and its constituent members. This begs the question - will the fire power of the bail out package prove enough?

So whilst we welcome the steps that have been taken, we still feel that some opportunities were missed in terms of the 'shock and awe' nature of the package, and we continue to ask ourselves whether the euro-zone has once again just bought itself more time.

Mike Turner, Head of Global Strategy and Asset Allocation, Aberdeen Asset Management