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Markets decide euro summit results are better than a poke in the eye from a sharp stick
12/09/2011 10:39 am EST
The package includes pretty much all that markets could have reasonably hoped for—like the package of moves from the European Central Bank yesterday—but certainly not everything the markets hoped for. In other words, there’s no magic bullet and the euro debt crisis won’t be fixed in a day, but neither did the euro go down in flames because Europe’s leaders dithered rather than decided.
This morning the German DAX Index is up 1.6%, the French CAC 40 Index is up 2.1%, the Spanish IBEX 35 Index is up 1.8%, and the U.S. Standard & Poor’s 500 Index is up 1.1%. Yields on Italy’s 10-year bonds climbed 11 basis points (or 0.11 percentage points) to 6.57%, while the yield on Spain’s 10-year bonds climbed 9 basis points to 5.91%. The European Central Bank was in the market buying Italian debt this morning.
So what did European leaders decide?
The 17 EuroZone nations agreed on a new side treaty that would require nations to enshrine a limit to structural budget deficits of no more than 0.5% of GDP in their national governance. (A structural deficit is one that discounts the effects of the economic cycle of booms and busts.) Opposition from the United Kingdom killed German efforts to achieve this fiscal integration through changes to existing treaties. Of the 10 nations that belong to the European Union but that aren’t a member of the EuroZone, all except the United Kingdom said they would consider joining the compact. It’s not clear how long negotiating this treaty might take—three months is one estimate—or if it would require a referendum in any of the 17 EuroZone countries. (Ireland was saying it thought it would this morning.) Amending existing treaties would have taken at least a year and required referenda.
The summit agreed to move up the deadline for getting the permanent euro rescue fund, the 500 billion euro ($666 billion) European Stability Mechanism, into operation to July 2012 from July 2013.
EuroZone members will pitch in 150 billion euros and members of the European Union that don’t use the euro will contribute another 50 billion euros (for a total of 200 billion euros or $267 billion) to the International Monetary Fund to used to backstop sovereign debt while countries enact fiscal and economic reforms.
What don’t the markets like about package?
The lack of a clear short-term response to the crisis. The European Stability Mechanism won’t be up and running until the summer so in the mean time defense of the euro, European banks, and of Italian and Spanish bonds falls to a reluctant European Central Bank, an IMF that will be strapped for funds even after the planned 200 billion euro infusion, and the current underfunded European Financial Stability Facility. Reports are that on Thursday night the European Central Bank decided to limit its weekly bond buying to the current 20 billion level.
And in the longer term the mismatch between the firepower that the EuroZone plans to bring to bear on the crisis—the 500 billion euro European Stability Mechanism--and the huge cash needs forecast for the EuroZone in 2012. EuroZone governments have to repay/refinance 1.1 trillion euros of long- and short-term debt in 2012. About 500 billion euros of Italian French, and German debt mature in the first half of the year, according to figures from Bloomberg. European banks, to add to the problem, have $665 billion in debt maturing in the first half of 2012, according to Citigroup.
At the summit, and for the moment, European leaders rejected arguments to grant the European Stability Mechanism a banking license that would have let it take funding from the European Central Bank was banks can do now.
That decision seems likely to get revisited in 2012. As does the decision at the European Central Bank to limit bond buying to 20 billion euros a week. And the 500 billion euro cap on the European Stability Mechanism.
I’m afraid this won’t be the last euro crisis summit.
But until then, or until the next euro panic, stock markets have a chance at a relatively brief period where what matters is the usual earnings news (and rumors) and the usual speculation over holiday retail sales. All that normal investing stuff hasn’t counted for much as long as the euro crisis dominated the headlines. Enjoy the “normal” while you can. I doubt that we’ll have it with us for very long.
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