The markets have anticipated Greece's last-minute reprieve from disorderly bankruptcy. In the lead-up to last month's Euro130 billion (HK$1.3 trillion) bailout deal, the Hang Seng Index surged from 19,000 to more than 21,000. Asian markets are up and the Dow Jones Industrial Average has finally broken through 13,000, a level not seen since before the collapse of Lehman Brothers in September 2008. Confidence has been further boosted by an additional injection of more than Euro500 billion into the European financial system by the European Central Bank, taking the total supplied under a three-year loan programme to more than Euro1 trillion. Investors, however, should be wary of markets bearing Greek gifts and massive injections of liquidity that will need to be refinanced.
Greece still faces bankruptcy. Doubts remain that its people are prepared to accept a punishing austerity programme that is part of the bailout bargain. The rescue has merely met the markets' minimum expectation by avoiding an ugly imminent default.
The rescue has created breathing space. But it will be just that as long as Europe lacks a coherent policy to address the pressing debt problems of Italy, Spain and Portugal as well as Greece, not to mention wider structural debt imbalances. So far, the crisis has revolved around a fixation with sovereign debt, reflected in volatile bond markets. But there is now increasing concern that Europe has taken its eye off a major obstacle to recovery, which is an even bigger stock of corporate and household debt. Much of this debt is in core euro-zone economies and previously was not widely associated with Europe's debt crisis.
A healthy debt market is essential to growth. And growth is key to the servicing and prudent management of debt. But a European age of austerity does not provide an ideal environment for paying down debt. In a worst-case, but not unrealistic, scenario there is a risk that the burden of servicing debt could increase. This could, in turn, cause a rise in bad loans in a banking sector that is already stressed and in many cases dependent on liquidity injections to keep credit lines open.
The European Commission says that 15 of the EU's 27 members have private-sector debt that exceeds its new safety threshold of 160 per cent of GDP. On this basis, a paper prepared for the Bank for International Settlements has concluded that debt problems facing advanced European economies are worse than previously thought.
Investors should, therefore, be mindful that Europe has yet to resolve fundamental structural problems and that working out the euro-zone debt crisis will be a long process. US economic indicators are more positive, but recovery in the world's biggest economy is still fragile. There is still room for optimism, but it should be tempered with caution.