This is Epsilon Capital Management’s 4 Part Series on the European Economy for the first quarter of 2012.<br /><br />Here we will cover the general sentiment of the European markets and look in-depth at Germany. <br /><br />The first quarter of 2012 witnessed several comforting developments in Europe. Greece fulfilled the pre-condition for securing its second bailout by convincing its private creditors to accept a 53.5% write-off on its debt. The deal eased concerns about a disorderly default by Greece on its sovereign debt. Following up on the liquidity-infusing program it introduced late last year, the European Central Bank (ECB) carried out another round of its Long-Term Refinancing Operation (LTRO), this time handing out to about 800 banks a total of €529.5 billion in 3-year loans at a very low interest rate of 1%.<br /><br />The move reduced not just the possibility of a financial contagion from Europe in the event of a sovereign default, but also the volatility in the continent’s bond market. Many of the banks that took the cheap ECB loans promptly increased their purchases of higher-yielding government bonds, which brought down, albeit temporarily, the borrowing costs of highly indebted countries such as Spain and Italy. The Euro-zone rescue fund also received a boost during the first quarter. To remain equipped to handle any future bailouts, finance ministers of the single-currency bloc raised the total value of their financial firewall from the current €500 billion to €700 billion.
