Turbulent week for eurozone

Financial Times
June 17, 2011

Fears about a Greek sovereign debt default, and the resulting contagion through the rest of the eurozone’s periphery, dominated market price action this week.

But Wall Street was on track to avoid a seventh successive weekly decline – albeit narrowly – and the euro staged a partial recovery, as the leaders of the eurozone’s two most powerful nations finally appeared to make a breakthrough on Friday over the thorny topic of private sector participation in a fresh rescue programme for Greece.

Angela Merkel, the German chancellor, and President Nicolas Sarkozy of France endorsed a voluntary rollover by private creditors of their holdings of Greek bonds – in the spirit of the “Vienna initiative” of 2009, when banks agreed to maintain their lending exposure in central Europe.

The move represented a climbdown by the German government – in the face of fierce opposition by the European Central Bank, backed by the French – over its view that Greek bondholders be forced to bear a “substantial” share of a new rescue

“The markets can take some comfort from the fact that once again the risk of a calamitous global markets crisis has united politicians around the need for policy co-ordination,” said Lena Komileva, global head of G10 strategy at Brown Brothers Harriman.

But she added: “A new deal for Greece will not bridge Europe’s policy credibility and public debt sustainability gaps, and hence it will not mark the end of the crisis.”

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