Updated from 10/08/11 to include news of a Franco-German agreement to recapitalize Europe's banks.NEW YORK ( TheStreet) -- Dare we say that Europe's leaders are finally beginning to get it? Judging by the three-day rally this past week, it seems investors were quite encouraged by the comments of German Chancellor Angela Merkel and other officials. What's more, Merkel reached agreement Sunday with French counterpart Nicolas Sarkozy on a plan to recapitalize Europe's banks. The stock market is still a gambling game at this point and as Federal Reserve Chairman Ben Bernanke puts it, Americans are a bit like "innocent bystanders." But if all the leaders start singing one tune, stocks could ramp up again in the coming week. Here's a recap of the previous five sessions:
As the risk of a widespread default grows, banks will need more capital to quell investor fears about solvency. Central banks can provide liquidity, as the ECB has said it is committed to doing so, but only policymakers can address the issue of solvency. Capital Economics estimates that haircuts of 25% on Greek, Irish, Portuguese, Spanish and Italian debt would roughly cost banks in those countries as well as banks in Germany and France a combined 200 billion euros. A worst-case scenario of 50% haircuts across the board would essentially double that loss to 400 billion euros, amounting to about 5% of the combined GDP of these economies. Already, Capital Economics reckons that "markets are fully pricing in this outcome." Before banks can be recapitalized, however, officials still have to get the European Financial Stability Facility expanded. Of the 17 countries that need to approve the expansion proposal, 15 have ratified it. Votes from Malta and Slovakia are due on Monday and Tuesday, creating added uncertainty near the beginning of the week.
As for Greek's next round of funding, the troika creditors have decided to push back their decision until after the originally scheduled decision day next Thursday. That means there's a chance Greece could miss a crucial bond payment on Friday, raising the risk that the country might default. Many economists think that the country can muster enough money to get through Friday but that it will still default in the future.
On Tuesday, investors will be poring over the notes from the Federal Reserve's last two-day meeting in September. If investors find signs that some officials are pushing for more quantitative easing, stocks could see a temporary move up. The minutes might indicate what other options were in the running before the Fed announced Operation Twist, such as leaving short rates near near-zero until the unemployment rate drops below a certain level. "Any hint that officials did give these options the once-over will lead to speculation that they might be implemented at
the Fed's next meeting on Nov. 2 ," according to Capital Economics. Other indicators include retail sales on Friday, which economists expect will continue to improve as effects from the Japanese earthquake ease and motor vehicle sales rebound. The University of Michigan's consumer confidence measure for October, also out on Friday, is expected to remain weak given the persistent stock market volatility into this month. -- Written by Chao Deng in New York. >To contact the writer of this article, click here: Chao Deng. >To follow the writer on Twitter, go to: @chao_deng >To submit a news tip, send an email to: firstname.lastname@example.org.