By Steven K. Beckner

(MNI) – Thursday’s agreement among European leaders to resolve the
Greek debt crisis must be almost as much of a relief to the Federal
Reserve as it is for financial markets.

The tentative deal to reduce Greece’s debts, recapitalize banks and
effectively enlarge a euro zone bailout fund makes it even less likely
that the Fed’s policymaking Federal Open Market Committee will take
approve additional monetary stimulus next week.

The 2.5% rise in third quarter GDP, while still modest and as
expected, also tends to keep the FOMC on hold with an already very
accommodative monetary policy.

However, neither the European pact nor the GDP report mean that the
FOMC will refrain from further easing indefinitely.

Stocks surged Thursday after the European deal became known, with
the Dow Jones Industrial Average closing up nearly 2.9% at 12,209.23 and
other major indices rising 3 1/3% or more.

But there is still plenty of doubt about how and whether the
17-nation euro zone will come to grips with its disparate fiscal
problems and debt exposures — even if the agreement is fully validated.

And even if the European debt crisis is resolved, there are plenty
of domestic concerns, including homegrown fiscal challenges, to worry
the Fed.

After months of haggling amid escalating market anxiety, European
leaders crafted a three-part plan, the broad outlines of which are to
1.) write down Greece’s debt by 50%, thereby reducing its debt to GDP
ratio to a more sustainable 120%; 2.) shore up European banks with new
injections of capital and, 3.) leverage the 440 billion euro European
Financial Stability Facility up to 1 trillion euros.

But none of this has been finalized, and if it’s been said once
it’s been said a thousand times: the devil is in the details.

And plenty of thorny questions remain, among them:

– Will Greece’s bondholders, in particular large banks in France
and elsewhere, accede to a “haircut” more than double the 21% that was
agreed upon in July?

– Will Greece, having won some debt relief, follow through on
commitments to rein in runaway deficit spending and flatten the upward
trajectory of its deadly debt-to-GDP ratio? Or will this reprieve just
enable more fiscal recklessness?

– Will Europe’s larger debtor nations, like Italy and Spain, which
have already had their bonds downgraded, restrain their own mounting
government debts and avoid following Greece over the cliff?

– Will the enhanced EFSF, with its proposed loan loss insurance
scheme, be viewed as sufficiently muscular by financial markets to
contain the Greek debt contagion? Or will bond traders continue to bid
up the cost of borrowing for Italy, Spain and others?

– How long can the European Central Bank continue to prop up the
euro zone’s weaker sovereign bond markets without losing all credibility
and popular support, particularly among the German people?

– And, ultimately, what is the long-run viability of a single
currency system in which some countries practice fiscal sanity and
others rely upon their neighbors for tough love bail-outs?

For the near-term, it seems likely that the deal, unless it
unravels, will steady financial markets and stave off another
crisis-induced recession. Fed policymakers, who had been seeing that as
a major downside risk, can breathe a sigh of relief — at least for now.

When FOMC members meet next week to revise their three-year
economic projections and set monetary policy for the next six weeks,
they can do so with greater confidence that the U.S. outlook won’t be
emasculated by developments across the Atlantic.

Fed policymakers will also go in with confirmation that, as most
had hoped and expected, the U.S. economy appears to have put deeply
subpar growth behind it. The 2.5% third quarter growth pace contrasts to
1.3% in the second quarter and 0.4% in the first quarter.

But while the trend has been in a positive direction, Fed officials
remain quite concerned. There is no assurance that the faster pace will
continue, and even if it does growth of 2.5% is no more than potential
and hence inadequate to the task of bringing the unemployment rate down
from 9.1% and bringing back into the labor force millions who have
simply stopped looking for work and are not even counted in that ratio.

And so, while some Federal Reserve Bank presidents think the Fed
has done all it can do, the FOMC majority is prepared to do more — just
not yet.

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** Market News International **

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