Europe Prepares Next Steps to Come out of Crisis

On Friday European stock index futures and put shares there on course to post their biggest quarterly decline since the months following the collapse of Lehman Brothers three years ago.

German Chancellor Angela Merkel and Greek Prime Minister George Papandreou during press-conference in Berlin. Photo: Prishtina Insight/Flickr

Euro STOXX 50 index futures fell 0.4 percent. Futures for Germany’s DAX and France’s CAC-40 fell by similar amounts, while financial spread betters inLondon called the FTSE 100 to open down as much as 0.6 percent.

At the same time European leaders are trying take new measures to stem the region’s debt crisis after German lawmakers approved an expansion of the euro-area rescue fund’s firepower

“The euro weakened as strong selling by Japanese exporters emerged but frankly, looking at the recent volatility, a dip like that is still not hugely important. The question now is what is the EU’s big, long-term solution to save it,” said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ.

Asian equities also fell, extending the worst monthly performance since the most volatile days of the global financial crisis in October 2008.

Mainland Chinese stocks listed in Hong Kong fell 3.8 percent, underperforming the rest of the region, with investors selling off bank shares on fears over their exposure in the event of a property market slump.

MSCI’s index of Asia Pacific shares outside Japan fell 1.0 percent after rising for three consecutive days. For the month, it was down more than 13 percent, its biggest monthly drop since October 2008.

U.S.crude futures rose above $82.50 a barrel in electronic trade on Friday, extending Thursday’s gains. Brent crude edged above $104 a barrel, but remained on track for the biggest quarterly drop in 15 months.

U.S.stock futures were down 0.5 percent after ringing up decent gains on Thursday. Euro finance chiefs will next week discuss accelerating enactment of a permanent rescue fund that provides more capital and a tool for managing defaults.

European officials are also studying measures that include leveraging the EFSF, said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London.

He said that there may be ‘‘an orderly Greek default later this year, with a haircut on Greek debt, an immediate recapitalization of Greek banks, European guarantees for restructured Greek debt and conditional fiscal support’’ for Greece.

The latest rescue package for Europe gained approval from Germany on Thursday, after Chancellor Angela Merkel won a vote in Parliament, throwing the financial weight of the Continent’s biggest economy behind a new deal.

The best case for Europe is a bailout of troubled governments and their banks that keeps the financial system from experiencing a major shock and sending economies worldwide into recession.

But a bailout doesn’t help to solve the problem of the huge debts that have taken years to accumulate — just as bailing out American banks in 2008 didn’t wipe out the huge amount of subprime debt that homeowners had borrowed but couldn’t repay.

“There is still a lot of uncertainty… Economic growth in Europe and the not that good and that will put pressure on the euro and give a bid to the dollar,” said Joseph Capurso, strategist at Commonwealth Bank of Australia.

“We have to adjust to lower growth,” said Thomas Mirow, president of the European Bank for Reconstruction and Development, referring to both Europe and America. “It is of course going to be very painful. But leaders have to speak frankly to their populations.”

On Thursday, markets were mostly up again following the German approval of the 440 billion euro ($600 billion) bailout fund, intended to keep the crisis from spreading beyond Greece and Portugal to other European countries.

With concern growing that Greece will be unable to avoid default, Greek Prime Minister George Papandreou will meet French President Nicolas Sarkozy today in Paris after seeing European Union President Herman Van Rompuy in Warsaw.

German Finance Minister Wolfgang Schaeuble said on Deutschlandfunk radio yesterday that Europeans “are aware of our responsibility. We have to take as many precautions as we can. We must ensure that Europe doesn’t become the starting point of a new, big financial and economic crisis in the world.” [via Reuters, The New York Times ans Bloomberg]


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