New European Union plans soothe markets for now

    New plans call for a closer fiscal union that will ensure  any countries which violate debt guidelines will be punished. However the target for setting the new rules is next March. The leaders also agreed to add 267 billion to funds meant to ease the lending crisis.
    Stock markets have reacted favorably so far although Italian and Spanish bond prices fell in spite of the fact that the European Central Bank is supposed to be buying them. Bond holders want the Bank to intervene even more to ensure that countries in trouble with debt can pay their bills. A demand that bondholders should share in any losses was diluted in the new plan.
   The UK will be excluded from the planned new fiscal union. The UK had demanded a veto over any new financial regulations it disapproved. Not surprisingly other leaders did not agree to this condition.
   While the new agreement was regarded as positive for banks, investors still wonder how some nations will be able to finance their burgeoning debts. In 2012 Euro Zone countries must repay over 1.1 trillion Euros in debt. Banks too will need to refinance very large amounts.
   A Citigroup economist predicted“deep euro-area recession and strained financial markets” next year with the economy actually shrinking throughout the year. The IMF is expected to play an expanded role in lending in the zone with funds being sought from outside Europe to help out. However as the IMF will no doubt impose reforms involving cutbacks and austerity as the price for loans it is not clear how economies with these loans can be expected to grow. For more see this article.