June 29, 2012 at 1:51 PM ET
A "breakthrough" agreement by European leaders desperate to show the world they haven’t run out of ideas to save the eurozone is short on details and does little more than buy time, analysts said Friday.
And after 21 summit meetings convened to head off the looming breakup of Europe’s common currency and the continent's ongoing downward economic spiral, it is not clear how much time the deal to shore up wobbly banks will buy.
“Every time they come out with something, it seems to lasts an increasingly smaller amount of time,” said Guy Wolf, a market strategist at commodities broker Marex Specton in London. “I don't see anything in this current statement that makes me think someone will go and build a factory in Spain. And that's what we're really talking about.”
With Greece’s economy in ruins, Spain’s banks on life support and Italy’s borrowing costs rising, eurozone leaders broke out the fire hoses at their latest meeting in Brussels.
The new measures, hammered out after 14 hours of contentious talks that pitted Rome and Madrid against Europe's paymaster Berlin, amounted to a willingness to bend the European Union’s existing aid rules to shore up failing banks and try to bring down rising borrowing costs that are strangling the weaker economies.
Under the latest plan, Europe’s two bailout funds will be allowed to buy bank shares directly instead of channeling the money through member governments. But the agreement included little detail on just how the new measures would be implemented.
It’s not clear, for example, who will decide which banks get funds, how much they’ll get or what conditions will be imposed in return for bailouts. Failed banks would be taken over by the European Central Bank, which currently has no system in place to do so.
With expectations for the summit so low, financial markets staged a “relief” rally after the deal was announced. The euro rose sharply against the dollar and yields on Spanish and Italian debt fell sharply. The Dow Jones industrial average was up more than 220 points in midday trading.
“We have avoided an Armageddon scenario – at least for the summer,” said Tai Hui, chief economist at Standard Chartered Bank.
But the agreement does little to bridge the widening political and economic divisions that continue to threaten Europe’s common currency and economic future.
The summit was supposed to have addressed Greece’s urgent need for assistance. Leaders of the newly formed Athens government, facing insolvency within weeks, have vowed to roll back German-imposed austerity measures that were agreed to by the former Athens government in return for aid.
A volatile confrontation between Athens and Berlin was averted when Greece’s new prime minister last week cancelled his trip for health reasons, and the newly appointed finance minister was replaced, also for health reasons. The long-running standoff between Greece and Germany remains unresolved.
With Greece off the agenda, attention at the two-day Brussels summit turned to the more imminent crisis in Spain, which recently asked for a bank bailout that could reach 100 billion euros ($125 billion).
Some economists believe the bank bailout may be a preamble to a wider bailout of the Spanish government, which has recently seen its credit ratings slashed and borrowing costs rise to unsustainable levels. While some economists and eurozone officials believe the impact of Greece's departure from the common currency could be managed, Spain's much-larger economy and pool of outstanding debt poses a greater risk.
The fallout from Spain has also pushed up borrowing costs for the Italian government, Europe’s third-largest economy and most heavily indebted eurozone country.
Friday’s summit agreement was aimed at calming investors who have been fleeing Spanish banks and government bonds. But it remains to be seen how much investor confidence the proposed bank backstop measures can restore in Spanish and Italian government bonds.
“There are a number of uncertainties about the conditions applied to (the backstop) and the rating agency’s reaction to countries applying for outside help,” said Philippe Bodereau, head of European credit research at PIMCO.
The summit brought into sharper focus the deepening divisions among European leaders, as Germany increasingly finds itself cast in the role of Europe’s financial guarantor. As the Europe’s largest economy enjoys relative prosperity – thanks in part to massive capital flight into German banks and government bonds – German voters have grown increasingly wary of further calls to commit their hard-earned savings to bail out their neighbors.
Following this week's summit, some reports suggested that German Chancellor Angela Merkel appeared to soften her steadfast opposition to guaranteeing other country’s debts. But with voter resistance to the idea running high back home, Germany’s leaders can ill-afford to commit to paying the bills of other euro zone governments.
“Germany has no good options,” said Wolf. “They either pay an incredibly large bill when the euro area breaks up or sign themselves up to a perpetual series of transfers to the rest of the euro area. So it's not surprising that they are stalling that decision for as long as possible. Because no politician wants to be saddled with that answer.”