In addition to setting a deadline for an agreement on dealing with European banks that have capital issues, Sarkozy finally implicitly acknowledged that the July 21st agreement for Greece is no longer workable (Greek 1 yr yield back at highs of 149%). He fought a change to it because of his fear of what it would do to the French banking system but has now finally realized that there is no other solution than a sharper writedown of Greek debt. His comfort now is based on the soon to be expanded EFSF. While Merkel and Sarkozy just have details to work out, the big detail won’t be easy to reconcile. That being how much money France will have to stump up for their banks instead of relying more on the EFSF and thus the Germans. A combined nationalization and breakup of Dexia has the Beligum stock market up at a 1 1/2 week high. Greek stocks are falling to the lowest since 1993 after Proton Bank was nationalized and Austrian stocks are down 3% after earnings trouble at Erste Group Bank. After being closed all last week, the Shanghai index fell modestly to the lowest since Mar ’09 after a news story reported that inflation is still the main focus of authorities and also in response, the yuan moved to a new high vs the US$.

Category: MacroNotes

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