Wall Street: bailout eases, doesn?t fix, crisis

NEW YORK ? [Reuters] Wall Street gave a cautious, welcome to Europe’s new emergency plan for tackling Greece’s financial crisis, but some strategists said it does not write off enough of the debt weighing on the euro zone.

Euro zone leaders on Thursday agreed to easier lending terms for Ireland and Portugal, as well as Greece, and private investors will swap Greek bonds for longer maturities at lower interest rates.

Leaders of the 17 euro zone nations said they would use their 440 billion-euro rescue fund in new ways to provide states such as Spain and Italy with funding in the event of a Greek default.

“There are a lot of details to be ironed out. But by and large, European leaders have gotten ahead of the crisis,» said Richard Franulovich, senior currency strategist at Westpac in New York.

“The problems seem to have been dealt with for now. This doesn’t solve the long-term problem, though,» he said.

Market strategists in the United States, still poring over the plan even as they tried to follow the US debt crisis, said it represented a compromise by the single currency’s political leaders who have been deeply divided.

Addressing one of the key differences, the private sector — banks, insurers and other investors — will provide a net 37 billion euros to the new package for Greece through 2014, on top of 109 billion euros in new official rescue funds.

Signs earlier on Thursday that a new euro zone deal was emerging from the discussions in Brussels boosted world stocks and the euro. The euro extended gains after the plan was announced.

The European leaders agreed the European Financial Stability Fund, the region’s rescue fund, would be allowed to buy bonds in the secondary market if the European Central Bank deemed it necessary to fight the crisis, a potentially powerful new weapon in their armory.

The fund would also be allowed to give countries IMF-style flexible credit lines before they are shut out of the market.

“The talk of the European monetary fund is a very big deal because this could basically change the global financial architecture and provide a regional level of support for the European Union,» said Kathy Lien, director of currency research at GFT in Jersey City, New Jersey.

Lien said support could be extended to Spain, Portugal, Ireland and Italy, as well as Greece, and the overall plan would help contain contagion fears. «So this is certainly I think a big step in the right direction,» she said.

Some analysts cautioned that the deal did not represent a sufficiently big cut in the amount of debt that Greece still must shoulder and provided no lasting fix for the long-festering debt crisis in Europe.

“This is really just kicking the can down the road. These countries need a serious hard restructuring. I do not think this is going away, and debt swaps rarely work,» said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman in New York.

“I am pretty sure three months from now or some time down the road this situation will emerge again,» Thin said.

Others questioned whether the emergency EFSF fund would be big enough in its current form to prevent any future crisis from engulfing the bigger members of the euro zone.

“It all depends on how large the EFSF will be. Will it be big enough to bail out Italy, for instance, if it goes through a liquidity crisis?» said Franulovich of Westpac.


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