Finnish restraint saves rescue deal

LAST Wednesday the eyes of the financial world turned to Finland. Finland? For all its virtues, that small Nordic country hasn't grabbed much global attention lately. But thanks to the quirky political and economic structure of Europe, last week Finland had the power to send financial markets into a tailspin.

As it turned out, the Finns didn't throw a wrench into the financial works. But that they were in a position to do so provided yet another reason for shaken investors to hide in the nearest bunker.

How did it come to this?

The euro zone has been a source of global instability for months.

In the latest episode, Finland, which has an impeccable credit rating, was asked to approve a measure that would aid its improvident southern neighbour, Greece.

The Finnish parliament had grave reservations it is already contemplating writing off some of its direct loans to Greece. But mindful of the possible consequences, the Finns voted to strengthen a European bailout fund, the inelegantly named European Financial Stability Facility.

That got world markets through Wednesday, but it hardly ended the European financial crisis even this phase of it. The next day, it was Germany's turn. After weeks of fierce debate, parliament passed the measure in a 523-85 vote.

On Friday Austria gave its approval. And between now and October 11, Cyprus, Estonia, Malta, the Netherlands and Slovakia will all have their say.

After that, if all 17 euro zone countries have granted approval, the newly empowered ?440 billion fund ($A609 billion) will be available to give Greece some succour.

"There are a lot of moving parts and a lot could go wrong," said David Kostin, the chief US investment strategist for Goldman Sachs. "And these macro issues are dominating micro ones like whether a particular company in the S&P is having a strong quarter and many of them are."

For months now, investors have been putting money in a traditional haven the US Treasury market, whose appeal has been burnished by the accommodative monetary policies of the Federal Reserve.

For stocks, though, a vicious circle has developed.

The global economy is weak and stocks worldwide have trended downward.

"The direction of the markets is being determined by geopolitical uncertainty on three continents," Kostin said. China's possible slowdown, the disappointing economy in the US and the European financial crisis are all weighing on the markets, he said, with the European predicament likely to be front and centre over the next several weeks.

In the case of the European Financial Stability Facility, political leaders and central bankers involved in the rescue effort already appeared to know it wouldn't be enough to resolve the crisis.

A vastly greater financial commitment is needed to prevent the crisis from spreading, many analysts say.

The European Central Bank may use some of the fund's money as collateral for making larger loans, effectively "leveraging" the fund and giving it more firepower, but the bank's powers are circumscribed. Any further fundamental changes must also be approved, one by one, by each country in the monetary union.

That is because the euro zone is not a fiscal union or a sovereign state and its founders didn't prepare for the eventuality that one of its members might be unable to pay its bills threatening the stability of banks, countries and markets worldwide. Furthermore, as things stand, it's not clear that the European Union is capable of achieving even the level of governance some would call it dysfunction that has lately characterised the US. This helps explain why the European crisis has, if anything, been even harder to resolve than the still-simmering one on the other side of the Atlantic, and why these linked crises are not about to disappear any time soon.

For now, though, uncertainty reigns, not only in Europe and the US but also in the Chinese economy, where efforts to curb inflation may also be throttling growth. Still, Kostin said, the profit outlook remained strong among the global corporations that dominate the Standard & Poor's 500. He expects that the index will rise in the fourth quarter closing modestly higher at 1250.

But in today's global economy, many little things can easily go wrong. If they do, he said, investing in stocks, particularly in individual stocks, is likely to be very difficult.

"The macro story is dominant," he said. And it hasn't been a very upbeat story.