Hopes high for Europe summit
NEW YORK -- Time is running out on eurozone leaders to prove to Wall Street that they have a viable rescue plan to stem the debt crisis in Europe that has rocked markets for months.
The eyes of investors will be on European Union leaders on Sunday when they convene for a summit that investors hope results in the announcement of a grand plan to ensure that Greece's debt crisis doesn't cause financial contagion.
"The importance of the summit is that European leaders find a way to communicate that they understand the magnitude of the crisis, are capable of tackling the issues, and that they have a plan that is workable," says Rod Smyth, chief investment strategist at Riverfront Investment Group.
Expectations for a market-friendly outcome have risen dramatically since last week, sparking a stock rally. A catalyst came last Monday, when word spread that Germany and France backed a plan to recapitalize European banks facing big losses on Greek loans. Momentum continued over the weekend when a summit of finance leaders from 20 leading economies expressed hope that Europe would address the crisis decisively.
German Chancellor Angela Merkel has been ratcheting down expectations in recent days, saying that not all of Europe's problems will be solved this week at the summit.
Wall Street is hoping that Europe's leaders come up with a three-step plan that will put Greece's finances on a more sustainable path so that its problems don't spread to other debt-weakened countries, such as Italy and Spain, says Fred Copper, senior portfolio manager of international equities at Columbia Management.
For months, markets have moved on rumors, headlines and leaks pertaining to Europe. The latest headlines include talk that European banks might have to take losses of up to 50% on bad loans to Greece, vs. the 21% agreed upon in July. European banks might need as much as 100 billion to 200 billion euros in fresh capital, Barclays Capital says. And a report from Britain's The Guardian Tuesday said European leaders were considering boosting the firepower of their bailout fund to backstop as much as 2 trillion euros ($2.7 trillion) in bad debt, Cooper says.
European leaders must craft a credible plan or risk more financial turmoil, says economist Edward Yardeni of Yardeni Research: "The plan they agree on doesn't necessarily have to be shock-and-awe, but it can't be, 'aw shucks,' either."
