France and Germany announce eurozone crisis plan; positive US jobs data

Updated On: Oct 10, 2011

The leaders of France and Germany have pledged to unveil a comprehensive plan to solve the eurozone's two-year-old sovereign debt crisis by the end of the month.

French President Nicolas Sarkozy and German Chancellor Angela Merkel made the announcement after talks on Sunday. They said the plan will propose "important changes" to the way the eurozone operates. Their package of proposals will include a plan for recapitalising European banks, accelerating economic co-ordination in the eurozone and dealing with Greece's debt problems.

The leaders said they would give further details by the end of October, following a 17-18 October meeting of European officials in Brussels and ahead of the G20 summit in Cannes on 3-4 November.

Germany and France had previously differed over how to recapitalise Europe's banks, said by some to require over €100 billion (US$134 billion) to withstand the sovereign debt crisis. Before last weekend's meeting, Paris argued in favour of using the European Financial Stability Facility (EFSF) fund, to recapitalise its banks. But Berlin has insisted the fund should only be used as a last resort.

Mr. Sarkozy refused to reveal what compromise had been reached, but said France and Germany were now in accord on what should be done.

Over in Greece, talks are still continuing over the latest bailout instalment for Greece. The European Commission, the European Central Bank and the IMF are currently deciding whether to release about €8 billion (US$10.9 billion) to help the Greek government pay its bills.

This is money from the original bailout agreed last year, but critics say the Greek government is not doing enough to justify the assistance. Yet without the instalment, Greece could go bankrupt by November.

Meanwhile, Slovakia is expected to vote by next Monday on a proposal to expand the EFSF, Europe's bailout fund, and give it greater powers. All eurozone members need to ratify the decision before it can be implemented, but the expanded EFSF proposal is expected to meet strong resistance in Slovakia. The former Soviet country is unhappy about having to bailout its theoretically richer neighbours.

Report: Stocks, euro inch up on debt deal hopes [Reuters, 10 Oct 2011]

Report: Eurozone crisis: Merkel and Sarkozy 'agree key changes' [BBC, 9 Oct 2011]

In other eurozone news, France, Belgium and Luxembourg have approved a plan to bailout the troubled Franco-Belgian bank Dexia, following fears it could go bankrupt.

Details were not released, but reports on Sunday said the bank will be broken up and partly nationalised. Dexia asked for help for the second time in three years after a liquidity squeeze sent its shares tumbling.

Dexia was previously the first bank to ask for a bailout, at the start of the present crisis.

Analysts say the situation with Dexia is a warning sign about the health of European banks. It has a global credit risk exposure of around US$700 billion, twice the gross domestic product of Greece.

Last Friday, the international ratings agency Fitch downgraded the sovereign credit ratings of Italy and Spain, and another agency, Moody's, downgraded 12 banks in the UK and nine in Portugal.

Report: Embattled Dexia bank in line to be bailed out [BBC, 10 Oct 2011]

Over in the United States, employment figures released by the US Labour Department were better than expected, showing the US economy is still growing, albeit at a much slower pace.

Total non-farm payroll jobs grew by 103,000 last month, while the revised numbers for July and August saw an addition of 99,000 more jobs in those two months. The US unemployment rate remained at 9.1 per cent.

In Asia, markets ended higher last Friday in response to the US jobs data, and analysts say the bullish sentiment will carry over to trade this week with the announcements by European leaders.

Singapore's Straits Times Index (STI) closed 1.43 per cent higher on Friday at 2,640.30 with some 1.58 billion shares valued at S$1.5 billion changing hands. Analysts say the STI will likely stay at the same level this week.

But the market is still volatile, and observers warn any bad news could send stocks tumbling again.

Analysis: Markets could get much needed lift with gains in US payrolls [TODAY, 10 Oct 2011]

The news from Europe and the US comes ahead of the Monetary Authority of Singapore (MAS) bi-annual policy statement, due this Friday.

While the latest news from the Europe and the US is positive, there is still ongoing uncertainty and slowing economic growth, leading to concerns about high inflationary pressures. Most analysts believe that the MAS is likely to ease its monetary policy by lowering the rate at which the Singapore dollar is allowed to appreciate.

The MAS is also looking at whether financial institutions here need to draw up plans for a quick recovery or quick closure in the event of a crisis, just as what regulators in a number of developed markets are enforcing, according to a report by the Business Times.

Analysis: All eyes on MAS decision [TODAY, 10 Oct 2011]

Analysis: MAS studying crisis recovery plan for banks [Business Times, 10 Oct 2011] (requires login)

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