• Reality check causes markets to plunge

    Stocks and the euro plunged on Monday (17 October) after German officials dampened expectations for a comprehensive solution to the sovereign debt crisis at an upcoming EU summit.

    German finance minister Wolfgang Schauble said EU leaders will adopt a five-point plan at the Sunday meeting, but “we won’t have a definitive solution this weekend.”


    Chancellor Angela Merkel’s spokesman Steffen Seibert also stressed that his boss “reminds [everyone] that the dreams which are emerging again, that on Monday everything will be resolved and everything will be over, will again not be fulfilled.”

    In Seibert’s words, the outcome of the Sunday summit will be “important steps on a long journey, a journey that will certainly continue well into next year.”

    Reacting to the news, US shares registered their steepest drop in two weeks and the euro went down 0.8 percent compared to the US dollar. Markets had hoped for a final deal setting out the conditions for a partial Greek default and giving the eurozone bailout fund a green light to stem contagion to Italy and Spain, as well as allowing for a quick recapitalisation of Greece-exposed European banks.

    Expectations had been reinforced at a meeting of finance ministers and central bank governors from the world’s most industrialised 20 nations last weekend. Coming out of the meeting, Germany and France said they had agreed on the broad outlines of a package.

    Leaders of EU institutions have also been raising expectations of a bigger deal on Sunday. The organiser of the summit, EU Council chief Herman Van Rompuy, said he is working with the EU commission “on a comprehensive package to create more confidence in the financial sector and in the sovereign bonds of countries under pressure.”

    Commission chief Jose Manuel Barroso said the summit “will be critically important,” floating the idea of introducing “criminal” liability for irresponsible banking behaviour so as to avoid financial institutions of repeating the same mistakes again.

    And on Monday, European Parliament chief Jerzy Buzek said: “I am confident the European Council will approve a package on Sunday enabling us to contain the crisis and avoid recession.”

    Responding to criticism that the parliament is proceeding too slowly in passing laws designed to prevent the same mistakes from happening again, Buzek said that he is pushing for fast-track procedures, but noted that “there should be time for democracy.”

    Meanwhile, the head of the eurozone bail-out fund, Klaus Regling, ruled out that the fund would be allowed to act like a bank, Handelsblatt reports. Regling confirmed that the idea had been discussed a few weeks ago, but was now off the table, due to opposition from Germany and the EU commission.

    Source: EUobserver, OEIC staff