European leaders headed home from a weekend of meetings in Washington vowing bolder steps to address widening anxiety about the Continent’s debt burden. But it will most likely be weeks or even months before any new action comes to pass.
It’s not clear whether the global markets will give them that much time. Investors will be watching a series of crucial votes by European parliaments due this week on an earlier package aimed at preventing a default by Greece, Ireland and Portugal.
Sensing urgency from the markets and keenly aware of the potential consequences of a rejection of that plan by the German Parliament when it votes on Thursday, Chancellor Angela Merkel drew parallels on Sunday between the risk of a Greek default now and the broader chaos in the financial system that followed the collapse of Lehman Brothers in 2008. “We are doing it for ourselves,” she said in a radio interview on Sunday night aimed at persuading a skeptical German audience
that setting aside hundreds of billions of euros to prop up shaky neighbors made sense. “Otherwise, the stability of the euro would be in danger.”
“We can only take steps that we can really control,” she said. If a Greek default started a fresh financial crisis, “then we politicians will be held responsible.”
All 17 member countries of the euro bloc must approve the strengthening of the rescue package, known as the European Financial Stability Facility, with votes set on Tuesday in Slovenia, Finland on Wednesday and Germany on Thursday. So far, only six countries have signed off, but European leaders say the process should be completed by mid-October.
Only after that do they seem likely to come up with a broader rescue package aimed at relieving the anxiety that has driven markets lower in recent weeks. The markets may not wait that long.
Indeed, for political leaders like Mrs. Merkel, the problem now is that investors have already concluded that the 440 billion euro bailout fund, the expansion of which is being voted on this week, might not be enough to stop the contagion from spreading. On Friday, the yield on two-year Greek notes rose to 69.7 percent, suggesting that investors considered a default all but inevitable.
When the initial expansion of the bailout fund was agreed to in July, worries centered on three smaller countries on the periphery of Europe – Greece, Ireland and Portugal. Since then, however, fears have multiplied about the ability of Spain and Italy, the third-largest economy in the euro zone, to keep borrowing heavily, creating doubts about pools of debt from countries that right now are considered “too big to bail.”
The worry is that a default by Athens would threaten these and other sovereign borrowers, as well as banks in France and Germany that hold tens of billions of euros in Greek debt. That, in turn, has helped push shares of American banks, which are intertwined with their European counterparts, sharply lower, dragging down the broader market.
“The next three weeks are absolutely critical, and they can still stabilize the markets, but I wouldn’t tell my clients to put money to work until we see it,” said Rebecca Patterson, chief market strategist at J. P. Morgan Asset Management. “As we stand right now, European policy makers have gotten well behind the curve. It’s not about the periphery anymore; it’s about the core, too.”
A fresh indicator of market confidence in European borrowers will come as Italy sells billions of euros in bonds this week, culminating on Thursday.