The European summit ends with more progress than anyone expected--hence today's rally--but with the EuroZone's big problems still unaddressed
06/29/2012 1:36 pm EST
In the broadest outlines European leaders agreed that
1) the EuroZone’s bailout fund(s) can be used to inject capital directly into struggling banks without being funneled through national central banks, which would add to national budget; deficits. The agreement clearly includes Spain. It might expand to Ireland. Italy? Unclear but it seems like not at the moment. This direct injection of capital, however, seems like it will only be possible after the creation of a EuroZone-wide bank supervisor. (See Item #2 below.)
2) a Eurozone-wide single bank supervisor will be created for all banks taking the place of the current regime that has each country’s banks governed by the country’s national bank or national bank regulators. German Chancellor Angela Merkel has said that she expects a proposal on how to do this by the end of 2012;
3) Loans to Spain from the permanent bailout fund, the still to be ratified (although Germany was scheduled to vote on this today) European Stability Mechanism will not have seniority to other, private bondholders (This is hugely important since giving seniority in the case of a default to EuroZone institutions would have resulted in more private investors fleeing the market for Spanish debt);
4) Countries that use the bailout fund to buy their debt will not have to submit to a full Greek-style monitoring program. (At least that’s what Italian Prime Minister Mario Monti thinks the summit agreed. Other officials, at the European Commission, for example, are still talking about “very strict conditions.” Monti has said that the troika (European Commission, European Central Bank, and the International Monetary Fund) won’t be involved in deciding when a country gets a bailout or what the terms might be. Both Germany and France say it will.)
And what didn’t the summit do? The EuroZone still doesn’t have a roadmap to fiscal integration, or to a banking union (including EuroZone wide deposit insurance.
The growth pact is the same meager $120 billion, most of it already budgeted money, that looked so inadequate when it was first proposed.
The existing European Financial Stability Facility still has to raise its money in the financial markets (since it wasn’t given a banking license and thus can’t tap the European Central Bank) and the new permanent European Stability Mechanism, the replacement bailout fund, doesn’t yet exist and is still limited to 500 billion euros in size. That amount was seen as too small to bailout Spain and Italy before the summit. It is still too small today.
This isn’t to say that the summit didn’t produce anything of significance. The move to inject EuroZone capital directly into Spanish banks is a major step toward treating the obligations of EuroZone banks as obligations of the EuroZone as a whole instead of individual national governments.
But nonetheless, this summit did very little but buy time. Past summits and agreements have done that as well only to see the EuroZone’s leaders squander that time.
The big problems remain and the clock is still ticking on the depressed Spanish and Italian economies.
The headlines—in Germany’s Der Spiegel “How Italy and Spain Defeated Merkel at EU Summit” and in Italy “Super Marios,” in a reference to the defeat of Germany at the summit by Mario Monti and in the European soccer tournament after two goals by Italy’s Mario Balotelli—do give Mario Monti enough of a success, in my opinion, to fend off an immediate move by Silvio Berlusconi’s People of Liberty Party to bring down the government and force an early vote.
But after today’s rally on relief that the summit produced anything will, I think the markets are likely to discover that the problems that existed before the summit still exist after the summit. I’d take profits (if any) here from swing trades or in positions that you don’t want to hold for the rest of the summer.
It’s just a question of how long the euphoria takes to wear off (and that will depend in a good part on the news flow out of the Chinese and U.S. economies in the next few weeks.)