The positive sentiment was reinforced by a report that the United States economy had grown at an annual rate of 2.5 percent in the third quarter, the best performance in a year, adding to confidence that the United States will not experience a double-dip recession and prompting investors to put some of their long-dormant cash to work.
But even amid the surge in stock markets worldwide, there were reservations in some quarters. The response in the European debt markets, the epicenter of the crisis, was muted, with little relief reflected in the interest rates that Spain, France and Italy must pay on their bonds. There has been concern, in particular, that Italy’s huge accumulated debt might be the next focus of a bailout effort.
The plan agreed to by European leaders in Brussels early Thursday, the subject of weeks of contentious bargaining, has three main planks: an effort to recapitalize weak euro-zone banks, an increase in the size and scope of Europe’s main rescue fund, and a proposal that banks take a 50 percent write-down on their Greek bonds.
It was the latest in a series of gatherings over the last year seeking to keep the sovereign debt problems of Greece and other vulnerable European nations from radiating through the financial system on the continent and beyond. Each meeting seemed to head off an immediate crisis, only to prove insufficient within months or weeks and prompt a new search for solutions.
And as always with the grandly presented European rescue plans, the devil with the latest one is in the details. Despite Thursday’s exuberance, many investors expressed caution as to how the plan would hold up in the coming days and weeks.
For one thing, while the agreement by banks to write down 50 percent of Greek debt was welcomed, the deal’s success is conditioned on investors’ agreeing to take such a large loss. If a large number of investors refuse to accept such a loss, then the plan loses its voluntary status and would thus become a default — creating more unease and panic in the markets.
Moreover, private investors are not obliged to take the write-down, and two big holders of Greek debt, the International Monetary Fund and the European Central Bank, are not granting debt relief. So it is not clear how much of Greece’s overall sovereign debt of 340 billion euros ($480 billion) is going to be forgiven.
And it remains to be seen whether the debt relief for Greece will prompt other countries — Spain, Italy, Portugal or Ireland — to seek similar treatment.
Investors have also questioned whether the answer to the euro zone’s debt crisis is taking on even more debt.
The main bailout fund, the European Financial Stability Facility, relies on the sterling credit of Germany and France for its borrowing power. Euro zone leaders have promised to use the fund to both provide insurance for investors looking to buy risky Italian and Spanish bonds and to increase its borrowing capacity to as high as 1 trillion euros.
But it has been criticized as being too small and cumbersome and too reliant on France, which may well see its AAA rating taken down a notch because of its own debt and deficit problems. Such a move would hurt the vehicle’s ability to issue bonds and attract capital from investors.
It also remains unclear if Europe, as it has promised to do, would be able to entice Asian and Middle East investors to put money into vehicles that would be linked to the bailout fund.
Europe’s 106 billion euro answer for its bank problem may also raise more questions than it answers. In contrast to bank rescue plans in the United States and Britain, European governments are not injecting funds directly into the banks. Instead they are asking that banks significantly raise their capital level, to 9 percent by next year.
But for banks that have been weakened from their exposure to dubious European debt, raising money from private investors will be difficult — especially as many of the likely sovereign fund candidates are the ones that suffered deep losses from investing in troubled American banks in 2007 and 2008.
All in all, despite the relief that an immediate crisis over Greece’s debt had been averted, it seemed clear that the continent’s tightly woven economic and financial systems remained fraught with risk.
The yield on Italy’s 10-year bond, which recently hit a high of 6 percent on concern over the country’s debt and commitment to fiscal reform, remained uncomfortably high at 5.8 percent. And the interest rates for Spanish and French bonds narrowed only slightly as well, reflecting a broader skepticism that this plan will provide a magic cure for Europe’s debt problems.
This article has been revised to reflect the following correction:
Correction: October 27, 2011
Because of an editing error, an earlier version of this article referred imprecisely to United States economic growth in the third quarter. The 2.5 percent figure represents an annual rate.
Article source: http://feeds.nytimes.com/click.phdo?i=e23087b7dbc38a8044d130ad21300ac9
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