Are policymakers about to take decisive action?

Signs that European policymakers may finalise a “comprehensive response” to the euro-zone debt crisis at the European Council meeting on 23rd October prompted the euro to climb sharply against the dollar last week and equity markets to rally. But we think that even a leveraged European Financial Stability Facility (EFSF) may not have enough money to provide bail-outs, loan guarantees and funds to recapitalise the banking system - all of which will be needed to bring the debt crisis to an end. What’s more, it will not address some of the other economic problems that the Southern European economies are facing. Accordingly, we still think that some form of euro-zone break-up is more likely than not.