Analysts, however, are being a little more reserved in their judgment. The walkup to and aftermath of the summit has been a lot like corporate earnings season: Markets have lowered their expectations gradually, and then the actual results have barely cleared those lowered expectations, giving everybody a warm sense of accomplishment.
The summit deal still leaves a lot up in the air, though on the positive side (if you can call it that), it might kick the can down the road long enough to allow a short-term stock-market rally. Here’s a roundup of some notes we’re getting this morning:
Goldman Sachs: Our central expectation remains that what will emerge is likely another step forward, building on past progress but leaving out important issues that will need to be clarified later (such as the meaning of “fiscal union”). Eventually, the “sequenced path” will gradually lead the ECB towards more proactive purchases on a larger scale (after national governments commit to additional fiscal adjustment, and future rules for the “fiscal compact” are agreed on). In the meantime, more ‘intermissions’ will likely follow a continued chain of progress as we approach the end of the year.
Camilla Sutton, Scotia Capital: The EU summit’s release (to date) is disappointing. The concerns we see are:
* The proposal has not been signed and is therefore tentative.
* The proposal lacks the ability to enforce these new rules.
* The suggestion of bilateral IMF loans is much smaller than the market anticipated.
* There is no attempt at a balanced effort (ie: no mention of growth).
* The details of the leveraging of the EFSF are still vague.
* The ranking of any overlap in debt of the ESM versus the EFSF have not been released; any funding through the IMF would likely rank senior to outstanding debt.
* The UK has opted out over its concerns with the financial transaction tax.
Hans Lorenzen, Citigroup: [M]arkets have stabilised again after the meeting of the Heads of State and Government actually delivered slightly more than we’d expected. The fiscal compact, which seemingly will become an inter-governmental Treaty signed by 25 out of 27 member states, will be modelled closely on the Merkel-Sarkozy proposal. The ESM ratification will be brought forward to July 2012 and will apply IMF rules regarding private sector involvement (that is, preferred creditor status) instead of the ‘Greek model’. The maximum combined firepower of the EFSF and the ESM was left at €500bn. However, the summit did produce an agreement to make an additional amount of up to €200bn available to the IMF – presumably through lending from national central banks (but not through the ECB) with an invitation to additional support from non-Eurozone countries.
Where does all this leave us? It feels as if we are edging closer to a ‘fix’ which might actually hold for a matter of months rather than a matter of hours, despite Draghi comments. At least, primary funding for Italy and Spain should be covered for 2012 and a good part of 2013 when you add the IMF resources to the EFSF with some form of leverage, even if it’s only two times, and the prospect of some further ECB involvement.
However, the plan being concocted is pretty messy. When the EFSF was established last year to address the Greek, Irish and Portuguese crisis there was a pretty clear shift in paradigm – perceptions of systemic risk dropped suddenly and there was a sharp market rally. Increasingly, it feels as if markets will have to ‘feel’ their way gradually this time given all the questions that remain unanswered…
Harvinder Sian, RBS: On the political deal: The Summit has not delivered a solution to the debt crisis even if there is progress to remove sovereignty in budget matters. This problem here is that budgets are not the problem – the macro imbalances are much wider and a policy of austerity will cripple growth for many countries without major stimulus offsets from the rest of Europe. Few in policy circles are thinking of EMU as a large closed economy. The ESM changes to the debt restructuring are superficial, even if the new Treaty will likely not refer to explicit restructuring risk. There is a de facto seniority in the IMF and the ESM will carry the same baggage and therefore continue to undermine demand for EGBs as they get subordinated to official lenders. The new IMF resources are welcome and we should expect some contribution from other regions to help build a firewall – and this is a headline positive risk. A true firewall really exists only if the ESM/EFSF/IMF were given a banking license with the ECB and this is not on the table. Moreover, watch out for the usual execution risks in the parliamentary processes and not just in Finland. In short, no change in the structural wider spread view.
On the ECB: The press conference yesterday told the market that the ‘sequence of events’ that we interpreted as signalling a more proactive ECB was less assured. This could easily be gamesmanship from Draghi and we suspect that since the ECB has got most of what it wanted from the Summit that the market will be eyeing risks of more elevated SMP action next week. This is feasible, despite the Draghi comments. We were expecting the ECB to be more aggressive in January anyway given the solid issuance risks that will somehow have to be digested. The key point about the SMP is that it is a very poor tool for the bringing back confidence. (a) The Draghi comments highlight the half-hearted ECB and especially Bundesbank commitment which then undermines any expectations of a bazooka or time consistency in what the ECB is doing; (b) The more the ECB buys, the more subordinated the private sector can become in any debt workout. In other words, the tactical support for EGBs exists via the ECB SMP but experience by now has proven (but somehow still ignored by many in the markets) that this is a selling opportunity in periphery.
Strategas Research Partners: First what we don’t have: there’s no comprehensive EU agreement, no dual EFSF and ESM, and no bailout fund with access to ECB funding.
But there is now an agreement among 23 of the 27 EU members to maintain tougher fiscal rules, though (importantly) the U.K. disagreed, and the Czech Republic, Sweden, and Hungary are still debating. What the enforcement mechanism will be for this fiscal discipline remains uncertain: EU-27 institutions cannot legally be used. Italian 10-year yields are back up to 6.5% this AM, so we certainly do not yet have an “all clear.”
Additionally, there was a move to involve the IMF further, as additional EU funding of 200 billion euro was set. This IMF move seems like a decent backup plan, but the euro-area economies giving money to the IMF, who could then give money to the euro-area, seems a bit strange. The IMF could attract monies from other countries, of course, but here (again) politics comes into play.
Peter Tchir, TF Market Advisors: Nothing really new here or unexpected or earth shattering or even approved. The bilateral loan thing is new (subject to confirmation) but something about that seems too bizarre to get excited about. If they have the EUR 200 billion lying around to lend, why use the IMF.
In the end I don’t see much here. I cannot imagine we are going to get any new support from the ECB on the back of this. I don’t think this is enough to get the rating agencies to take the countries off of watch. Nothing has been really agreed to. I’m not even sure that if everything is implemented it is enough to avoid some countries getting downgraded.
Since I started reading this, markets have improved a bit, but once again, as people read more and get past the headlines and the lipstick, this is very disappointing. The UK has taken a further step away from the EU and may have opened the door for more countries to take that step over time since everything that was “agreed to” still needs to be ratified and implemented and defined. For the latest updates on the stock market, visit Stock Market Today For the latest updates PRESS CTR + D or visit Stock Market news Today
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