Regular readers know that in the absence of current asset and liability-level disclosure the adequacy of any specific amount for a bank recapitalization will be doubted by the market. This is why your humble blogger has advocated that European policymakers agree on a process for reaching the solution for recapitalizing the Eurozone banks instead.
That process involves disclosure (first by the financial regulators and then using a data warehouse with each bank's current asset and liability-level data). With disclosure, market participants can use their analytical capabilities to help in determining how much capital in total and for each bank is needed for a recapitalization. Subsequently, a decision can be made as to the source of the capital - private markets, retained earnings, bailouts...
Mrs. Merkel and Mr. Sarkozy didn't give any details of their plan, so and, with the French president still giving no explicit support to German proposals for recapitalizing European banks they have essentially asked financial markets to just trust them.
For the moment, they are.
Background sentiment has also been helped by an improved global economic picture, with last Friday's rise in U.S. payrolls and hopes of a strong third-quarter earnings season helping to boost sentiment.
Even so, this faith in Mrs. Merkel and Mr. Sarkozy could be misplaced.
Ulrich Leuchtmann, senior currency strategist at Commerzbank in Frankfurt, is among those who don't expect the euro's rally to last long. "These comments might be suited to impress the odd naive voter. It seems rather unlikely, though, that the financial markets will be impressed by these comments on a sustainable basis."
Kathleen Brooks at Forex.com, a foreign-exchange trading site based in London, also questions why financial markets should have faith in the process in the first place. "The European Union has failed to resolve the euro-zone crisis over the last two years, so three weeks to come up with the be-all and end-all solution seems a bit rich."