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The Eurozone Crisis Is Over! ... Or Is It?

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"I'll make him an offer he can't refuse."
-- Don Corleone, The Godfather

Were Angela Merkel and Nicolas Sarkozy taking a page out of The Godfather's book? To read some of the press reports about the Greek bond deal reached early this morning, it certainly sounds like it.

Private banks, represented by Charles Dallara of the lobbying group The Institute of International Finance, agreed to take a 50% "voluntary" writedown on their Greek bonds. Why would they agree to such a drastic cut? For one thing, there's reality -- it's been very obvious for a long time that given the financial state of Greece, the value of its paper isn't in shouting distance (or maybe even collect-calling distance) of face value. Maybe more important -- if you want to believe the Euro-leaders-as-Don-Corleone story -- European heads of state threatened that if banks didn't agree to the 50% cut, they'd let Greece follow a path to complete insolvency.

At that point it became a pretty simple math equation:

50% > something far closer to zero

In the aftermath of the global financial crisis, some may question how good bankers really are at even simple math, but this seemed to strike a chord.

It isn't just the Greek debt deal that has markets so excited today, though. In addition, eurozone leaders came to an agreement in principal on leveraging the European Financial Stability Facility by as much as 5 to 1. This was seen as a key step in the region's fight to head off its debt crisis because it will provide a huge amount of financial firepower to help bond buyers feel safe even as countries like Italy, Spain, and Portugal struggle to manage their balance sheets.

But wait, there's more! As if those two agreements weren't enough, the group also came to terms on a recapitalization of some of the region's biggest banks. The plan is to use some $150 billion to provide euro-area banks a stronger capital base and put them on firmer financial footing.

The agreement and your portfolio
If you've taken even a moment to peek at U.S. indices today, you know that you're happy about this agreement because U.S. markets are rallying. As of this writing, the Dow and the S&P 500 are up more than 2% each.

But why, specifically, should U.S. investors be happy about this?

Obviously if you hold almost any major European stock, you're seeing some serious pops in your portfolio. Spain's Telefonica (NYSE: TEF  ) is up 5%, Germany's Siemens is up more than 4%, and even lumbering ol' France Telecom has gained over 4%. Eurozone banks are flying even higher, with National Bank of Greece (NYSE: NBG  ) jumping more than 10%, Banco Santander (NYSE: STD  ) up more than 8%, and German giant Deutsche Bank leaping 16%.

But this hits closer to home as well, since many major S&P 500 and Dow components do very sizable chunks of business in Europe.


Europe Revenue Share (2010)

Philip Morris International (NYSE: PM  )






United Technologies (NYSE: UTX  )


Cisco (Nasdaq: CSCO  )


Source: S&P Capital IQ. *Europe, Middle East, and Africa.

At the same time, the European Union is a very important trading partner for the U.S. and a major export market. A healthy EU -- or at least one on a determined path to better health -- could be good news for the U.S. economy as a whole.

Source: U.S. Census Bureau.

The devil is in the details
I hate to finish this rah-rah celebration by getting all realistic, but amid all of the agreeing that euro-area leaders and banks did last night, there was somebody conspicuously absent from the party. He's a little fellow we might call Mr. Details and he has a tendency to cause problems after big, headline-grabbing agreements are reached.

Whether we're talking about the Greek debt writedown, the leveraging of the EFSF, or the bank recaps, the agreements last night were largely in principle and the details will still need to be hammered out. This still provides plenty of room for the head-butting and political stalemates that have been a thorn in the side of this process to date.

Don't get me wrong, I'm no pessimist -- far from it. But for those with champagne glasses sky-high, I just think it may be better to take the good ol' "cautiously optimistic" approach rather than the "Justin Bieber fan club" approach when it comes to reacting to these new developments.

But hey, that's just me. More important, how are you handling the European debt crisis in your portfolio? Chime in by taking this quick survey.

The Motley Fool owns shares of Cisco Systems, EMC, Telefonica, and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Cisco Systems, France Telecom, McDonald's, and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of McDonald's and Siemens, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (14) | Recommend This Article (33)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2011, at 12:51 PM, griderX wrote:

    It's intresting to see how the CDS market is going to play out....I've been reading articles stating that since the 50% haircut was voluntary they don't need to pay out.

  • Report this Comment On October 27, 2011, at 1:35 PM, jimmy4040 wrote:


    That's correct, so ironically, the smart investors who hedged their position are the most screwed today.

    "Who Decides If Greece Triggers a CDS Payout?"

  • Report this Comment On October 27, 2011, at 2:52 PM, NovaB wrote:

    When governments put a match to $140 BILLION of privately held debt someone is going to feel lots of pain. Who? Stock holders? Bank management?

    I expect more than one bank will vanish by the end of the year.

  • Report this Comment On October 27, 2011, at 3:34 PM, mikecart1 wrote:

    This deal will be just as effective as the United States bailout. You will see the same results that we all saw with unemployment, economy, and the overall system - nothing.

    Cheers to Europe for getting ready to experience what the United States is already experiencing!!!

  • Report this Comment On October 27, 2011, at 4:07 PM, electech98 wrote:

    Mike, I was about to comment the same! Just another way to kick the can down the road...and one of these days we're gonna run into a huge pile of cans!

  • Report this Comment On October 27, 2011, at 4:20 PM, Gloomfrost wrote:

    Overbought Arr!! Overbought I sayyy!

    Collect ye' plunder and plant yer rudders farrr 'way from thiss 'ere booty Arrr!

  • Report this Comment On October 27, 2011, at 4:22 PM, 1984macman wrote:

    mikecart1 and electech98, when will you learn to pull your heads out of that hole? There isn't an economist worth their salt that buys into your meme that the stimulus package did nothing. Still, I encourage you all to continue making up facts to suit your political persuasions. In the meantime, the rest of us will continue making money based on facts not fairy tales. We'll be laughing at you guys all the way to the bank!

  • Report this Comment On October 27, 2011, at 5:00 PM, DJDynamicNC wrote:

    @Mikecart and @Electech - Europe has been banging away on the austerity drum far harder and longer than the US has, and it's precipitated precisely this crisis. You can pretend the stimulus did nothing or you can be honest, but you cannot do both.

  • Report this Comment On October 27, 2011, at 5:35 PM, vriguy wrote:

    I sold a good chunk of my foreign ETFs - I expect to buy them back when they drop by 5-10% over the next two months.

  • Report this Comment On October 27, 2011, at 5:45 PM, police12345 wrote:

    The Eu is like a thread hanging from a skirt being pulled by an unsuspecting child - Oh but what fun. Pull and pull then - yes the skirt completly falls of exposing the naked truth. The EU was never built on a solid foundation and it will fall apart within 4.5 years unless solid foundations are set in place so that the anchor holds. Obviously Germans will not continue to support the socialist programs of countries carrying their financial wight.

    Socialism, communism offers no incentive to be creative, work harder and smarter.

  • Report this Comment On October 27, 2011, at 7:08 PM, xetn wrote:

    This is just more "kicking the can" and the crisis will continue. Ultimately, Greece will default and then the other PIIGS will follow. This will result the major banks being bailed out or maybe the collapse of the EURO and EU.

  • Report this Comment On October 27, 2011, at 8:55 PM, ManchurianAnthro wrote:

    I agree, I think the stimulus must have some level of effect, and this EU action has to somehow help too. But, maybe I am somewhat of a pessimist too... I locked in some profits in U.S. markets today, to keep the powder dry, so I can buy back into some targeted equities on the next big dip... as the same time, I am still feeling positive about my earlier loading up on NBG, STD, LYG etc on the cheap... guess we'll see what in fact happens.

  • Report this Comment On October 27, 2011, at 10:27 PM, dstb wrote:

    The worldwide financial system is so screwed.

    If the banks are taking less than a full repayment wouldn't that be considered a default? And wouldn't that then trigger credit default swap payoffs all around the world? The super huge, unregulated market. This is a house of cards and we will all pay in the end for socialism gone wild.

  • Report this Comment On October 28, 2011, at 1:49 AM, Petersl41 wrote:

    The one interesting thing I have observed both leading up to the eurocrisis "resolution" and the day after, is that the price of gold and other precious metals regained much of what was lost during the recent correction. If gold is a way of measuring fear in the marketplace as well as a means of taking the temperature of efforts to strengthen the world economies, then at least this one market segment has, at least so far, given a negative vote for what is occurring in Europe.

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