Just seven days from today is all we have until we know whether the eurozone debt crisis will be put on a track towards settlement once and for all.
Despite last week’s confidence rally on global markets, the European financial crisis isn’t resolved and won’t be until the end of the European Union leaders’ summit on October 23.
So we should be very wary of market moves in the coming week, especially a continuation of last week’s rebound; it could all come to tears if the EU can’t get its act together.
Last week’s a near 4% jump in the value of the euro against the US dollar summed up the strangeness of last week’s rally.
It was a rally based on speculative hope and nothing more.
Copper also jumped, despite rising fears about the Chinese economy.
But more data on the Chinese economy will test that confidence this week.
The week’s trading was all a bit surreal ahead of Saturday’s meeting of G20 finance ministers and the knowledge that it wouldn’t announce anything dramatic.
The meeting issued a strong challenge to the EU to sort out the problem and come up with a believable plan by next Sunday.
But no one has dared to say what happens if the EU summit next Sunday fails to come up with the goods.
A summit in May 2010 was supposed to have ended the fears over euro debt once and for all and the big idea was the European Stability Fund and its 440 billion euros of "firepower".
Nineteen months later and that Fund (and its re-worked purpose, agreed to at the July 21 summit) has just been approved by all 17 eurozone governments, but it is clearly not big enough to impress markets that the debt problem can be resolved.
Hence the latest plan and summit next Sunday which was always going to be the most important meeting of the year for the global economy once the debt crisis re-erupted in August.
Now the G20 finance ministers have made sure the Europeans realise that this is their last chance. They have to get it right once and for all.
Saturday’s meeting of G20 finance ministers in Paris used very direct language, saying they expected the EU summit to "decisively address the current challenges through a comprehensive plan".
In other words, no backsliding or trying to duck the issue, as the Europeans have done time and again in the past 20 months.
China, India, Brazil, Russia and other emerging economies are increasingly worried Europe’s failure to deal with the issue will drag the still growing part of the world into a recession, meaning the entire world economy could suffer a massive slump in 2012, instead of the 4% growth forecast by the IMF last month.
That would damage Australia, so it was odd to see Finance Minister Wayne Swan lining up with the Americans and opposing a plan from Brazil to lend more money to the IMF so it could take a bigger role in bailing out Europe.
French Finance Minister Francois Baroin, who chaired the meeting, claimed France and Germany were well on the way to agreeing a plan (agreed to a week ago) to reduce Greece’s debt, stop contagion and protect Europe’s banks.
The idea is that European banks will be recapitalised and the eurozone’s rescue fund could end up more like an insurer (rather than lender of last resort) so that it covers, for example, the first 20% of losses a bank could suffer on government bonds, thereby multiplying its financial firepower fivefold (to around $US2 trillion).
More problematic could be renegotiating a second Greek bailout agreed in July which now looks insufficient and will require bank creditors to take deeper losses, something they are reluctant to do.
The communique urged the eurozone "to maximize the impact of the EFSF (bailout fund) in order to address contagion".
And EU officials said the most likely option was to use the 440 billion euro fund to offer partial loss insurance to buyers of stressed member states’ bonds in a bid to stabilize the market.
Efforts by some countries to increase the IMF’s resources so it could play a bigger role in Europe to fight the crisis ran into resistance from the US and others on Friday (including Australia), burying the idea for now and putting the onus firmly back on Europe to tackle the problem.
The Financial Times reported at the weekend that the private lenders were opposed to taking a loss of more than 21% on their Greek bonds, but the paper said bigger losses will have to be agreed to if the rescue deal is to be agreed on by October 23.
The EU says the July 21 agreement on Greece won’t be re-opened, but "re-visited" whatever that means.
Reuters reported the following comments from leading non-EU ministers which highlights the pressure the eurozone will be under to get a deal done.
"Europe needs to get its act together because unless the crisis is put to an end, it will start to affect emerging economies which have enjoyed strong growth," according to Japanese Finance Minister Jun Azumi.
Canada’s finance minister Jim Flaherty, said the risk of a global recession would be dramatically higher if next Sunday’s European summit failed to deliver.
And British finance minister George Osborne told reporters his continental eurozone colleagues "will have left Paris under no misunderstanding that there is a huge amount of pressure on them to deliver a solution to the crisis".
Both said the IMF already had very substantial financial firepower and Washington would support committing more of the existing resources to supplement a well-designed European strategy with more eurozone funding.
If the
