Eurozone government leaders have proclaimed that they're committed to keeping their single currency intact. A €440 billion European Financial Stability Facility (EFSF) has been in place for some time to assist high-debt nations. More recently, they’ve reached agreements on how best to expand the EFSF, on the “voluntary” level of losses accepted by owners of Greek sovereign debt, and the proper level of European bank capital. But beyond the headlines, the focus should rightfully be on fiscal reform and the prospects for growth. On that score, a solution remains elusive. While the political agreements are likely to prevent another ‘Lehman event,’ Europe may not be able to avoid recession.

 Selected Highlights

• There has been acknowledgement that Greece’s debt-to-GDP ratio will surpass earlier forecasts and, absent restructuring, could exceed 180%, as the Greek economy is likely to be much weaker than previously believed. Thus, the structural reforms being put into place will likely take longer to gain traction and debt will continue to accumulate.
   
• Shares of European stocks in general (and banks in particular) have been poor investments recently. For example, Credit Agricole, one of France’s largest financial institutions, has declined some 40% since June 30. While some may attribute this to fears of exposure to sovereign debt that may be subjected to a ‘haircut,’ there’s also the prospect that near-term credit demand may be weak. This would crimp bank earnings and stock valuation.

• October’s Purchasing Manager’s Indices (PMI) were not encouraging (see chart below). The PMI indices can, at times, portray the near-term direction of sectors of the economy. These series – one dedicated to Services and the other devoted to Manufacturing – suggest that Eurozone GDP is set to contract. This only reinforces our cautious view of the region.