Initial euphoria over EU summit deal starts to fade

28th October 2011, Comments 0 comments

Markets continued to gain succour from a landmark deal to solve the eurozone debt crisis Friday, even if some of the initial euphoria faded as attention switched to the plan's implementation.

After rocketing Thursday, stock markets opened in more muted fashion on Friday, with London's benchmark FTSE 100 index edging up 0.02 percent to 5,714.7 points, Frankfurt's DAX 30 adding 0.41 percent to 6,364.18 points and in Paris the CAC 40 firming by 0.23 percent to 3,378.58.

"While the measures should appease markets in the shorter term, in our view it still falls short of the comprehensive package needed to resolve the underlying, structural issues facing the euro area economy," summed up analysts at Goldman Sachs in a weekly note to investors.

Similar reservations were heard out of Beijing, where the finance ministry said it wanted details of the plan before lending a hand to Europe by investing in the eurozone bailout fund.

The influential People's Daily -- seen as the mouthpiece of the Communist Party -- also believed the deal did not address the root cause of the problem.

The deal, reached reached after marathon EU talks in Brussels which lasted into the early hours on Thursday, "to some extent mitigated market concerns over the European debt crisis and will play a positive role in stabilising global financial markets in the short term," the newspaper said.

"However, the summit did not reach any decision on institutional reform and therefore did not eliminate concerns over the (causes of) the European debt crisis at the root," said the article, written by a finance professor and an economist.

US President Barack Obama, who has been pressing Europe for months to act and prevent the world from falling back into recession, also rather pointedly said Washington was now "look(ing) forward to the full development and rapid implementation of their plan."

The Brussels deal is designed to address Europe's three-pronged crisis: avoiding a Greek default, backstopping other countries struggling with debt and improving the war chests of at-risk banks.

It includes quadrupling the firepower of the European Financial Stability Facility (EFSF), the EU emergency rescue fund, to one trillion euros ($1.4 trillion) and a new 100 billion euro bailout for Greece.

One of the hardest part of the deal to attain was forcing banks to take a 50 percent loss on their holdings of Greek debt to lessen Athens' financing burden and a push for banks to strengthen their capital base by a collective 100 billion euros.

But the deal left some key questions unanswered about the long-term coherence of the eurozone -- particularly how budget discipline could be maintained in the future across the 17 countries of the disparate monetary union.

It also remained to be seen whether bank writedowns of 50 percent on Greek debt would trigger a wave of insurance claims, spreading damage through the financial system.

In their note to investors, Goldman Sachs analysts Dirk Schumacher and Lasse Holboell Nielsen said it remained unclear how effective the measures to widen the scope of the EFSF "will ultimately prove to be and whether sufficient lending capacity can be raised to cover Italy also."

For Erik Nielsen, global chief economist at Unicredit, "the devil is in the details."

The analyst was particularly sceptical about one specific part of the deal which would entail China and other top emerging economies coming to Europe's rescue.

"It is not clear why Europe would go abroad to borrow euros (which, ultimately they could print themselves), and possibly against some implicit political indebtedness to countries they might face in future discussions, for example on trade or climate change issues," Nielsen argued.

"Second, it is not clear that other countries would see a reason to participate in such a set-up without additional guarantees or political commitments -- if they liked the risk then there are bonds out there to buy already now," he said.

Other commentators doubted whether the deal will deliver growth, the key to ultimately getting past the region's debt problems.

"The plans... look more like a peashooter than the 'bazooka' previously promised to tackle the region's problems," skeptical Capital Economics analysts told clients.

"We have not altered our view that the crisis will deepen over the coming quarters, ultimately resulting in some form of break-up of the currency union," the analysts said.

© 2011 AFP

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