As news spread of European leaders sealing a deal to fix its debt crisis, stocks throughout the world rose. Europe has put together a deal that would shored up its bailout fund, pledged new funds for Greece and persuaded/forced banks to take a 50% loss on Greece's debt. As expected, stock markets rose on the back of this grand deal.
The stock markets are counting their chickens before they hatched.
I am not convinced that this “grand deal” will fix Europe’s debt crisis because the deal is missing one key ingredient of solving the crisis. It didn’t say how they Europe intend to deal with the problems facing Ireland, Portugal, Italy and Spain.
Greece might be the biggest problem facing Europe currently but they are not the only one in trouble. In fact, if things come to a head, the debt crisis of Italy and Spain will dwarf Greece by a hefty margin. How does Europe intend to deal with the potential debt crisis of Italy and Spain?
Keep in mind that under this current deal, they are already forcing banks to take a 50% loss on Greece. I doubt they would be able to get the banks to take any more pain for Italy and Spain. Even if the banks want to, the size of Italy and Spain might make that impossible!
So…what’s the strategy to deal with Italy and Spain? Until they answer those questions, don’t expect the European debt crisis to go away anytime soon.