12 Reasons Why Euro Accord May Not Calm Markets

Genevieve Signoret

One WSJ article and one Reuters article published yesterday together lay out 12 reasons why the euro accord may not calm markets:

  1. For starters, the accord is a novel arrangement among up to 26 governments because the U.K. refused to back treaty change for the whole EU. (WSJ)
  2. The agreement will require ratification from national parliaments—and a possible referendum in Ireland. (WSJ)
  3. The summit disappointed some analysts by failing to bolster substantially the resources for the euro zone’s bailout funds—though it promised an extra €200 billion for the International Monetary Fund. (WSJ)
  4. At German insistence, it also ruled out moves for now toward common euro-zone bonds—one way in which the resources of the stronger and weaker governments could be pooled. (WSJ)
  5. Berlin also succeeded in excluding direct links between the euro bailout funds and the ECB, which would have given the funds substantial extra firepower. (WSJ)
  6. In an effort to encourage investors, the leaders agreed to soften their insistence that private investors should take losses in future euro-zone bailouts. That step adds credibility to their insistence that Greece, already negotiating a deal that implies losses for bondholders, is a unique case. (WSJ)
  7. Stock markets rose on Friday as the summit drew to a close but Italian borrowing costs came under further upward pressure. Price action in the coming week will deliver a more considered verdict. (Reuters)
  8. EU leaders agreed to lend up to 200 billion euros to the International Monetary Fund to help it aid euro zone strugglers, and to bring forward the permanent rescue fund European Stability Mechanism (ESM) by a year to mid-2012. Those steps, together with a leveraged EFSF – the existing bailout fund – are intended to help boost help for troubled euro zone countries, such as Italy and Spain, the bloc’s third and fourth largest economies, as they muddle through their refinancing crunches. Italy alone has 150 billion euros in debt falling due between February and April of next year. However, it is still months until the ESM comes into force and few international investors seem keen to pay into the European Financial Stability Facility (EFSF). (Reuters).
  9. Add to that the Damocles’ sword of a Standard and Poor’s rating downgrade hanging over euro states, which would also likely prompt a downgrade of the EFSF’s credit worthiness, and the available funds could well fall short of needs again. S&P’s statement that its review was due to end “as soon as possible” after the summit is likely to keep investors on their toes this week. (Reuters)
  10. “A lot of uncertainty remains. Most of all we have to implement quickly what was agreed,” German Finance Minister Wolfgang Schaeuble told public broadcaster ZDF. “We’ve got to work on that with high urgency. We can’t go into our Christmas break already.”Such uncertainties include the plan to push forward the ESM, writing the new fiscal rules into national law and details on how to fork out up to 200 billion euros for the IMF to boost its crisis-fighting arsenal. (Reuters)
  11. Italian and Spanish bond sales will mark the first big test of post-summit market sentiment next week, with Rome expected to pay a record cost to borrow. Germany, Europe’s benchmark issuer, also auctions two-year Schatz notes. A first indication will come from short-term debt auctions on Monday and Tuesday by Italy, France and Spain ahead of the more challenging bond sales. (Reuters)
  12. Investors gave a mixed reaction before the weekend. European stocks rose, while the euro pared gains on speculation that national authorities will struggle to implement the agreement. Yields on Italy’s 10-year notes rose 8 basis points to 6.53 percent, while Spain’s gained 3 basis points to 5.85 percent. (Reuters)
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