Wednesday

11th Dec 2019

First doubts emerge over eurozone deal

  • The New York stock exchange: Markets rebounded after Thursday's deal (Photo: DanDeChiaro)

Markets sky-rocketed on Thursday (27 October) in reaction to the eurozone deal sealed by EU leaders earlier that morning, but economists are starting to question the fine print, which Polish Prime Minister presciently dubbed as "hell" hidden in the details.

Stocks, commodity prices and the euro hiked on Thursday, as euphoria seemed to have gripped traders all around the globe after the second Greek bail-out, bank recapitalisation and an increase in the eurozone's guarantee fund was announced. One of the US indices, S&P, reached its highest monthly gain since 1974.

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But the details remain sketchy on how the current €440 billion worth of loan guarantees in the eurozone rescue fund (EFSF) will be boosted to around €1 trillion without any country increasing its contribution, via obscure financial engineering potentially including investments from China, Brazil and other emerging economies.

In addition, it is not clear how to reach the agreed 50 percent writedown on Greek debt for private investors. There is no clarity on how many banks will take part or which ones as the haircut is supposed to be voluntary.

The positive market reaction is "deja-vu", Sony Kapoor, an economist from Re-Define think tank told EUobserver, noting that the same has happened after each eurozone summit. "The fact that a deal has been agreed, any deal, impresses people. Until they start de-constructing it and parts start unravelling."

What is new, in Kapoor's view, is that leaders have started talking about important issues beyond Greece, such as strengthening the banking sector.

"But two big issues are still missing: a strategy for growth and the central role the European Central Bank has to play."

Economist Sony Kapoor analyses the outcome of the eurozone summit.

A deal, but...

Politicians around the globe welcomed the deal, but noted that fast implementation is now key.

“I was very pleased to see that the leaders of Europe recognise that it is both in Europe's interest and the world's interest that the situation is stabilised. And I think they have made significant progress over the last week and the key now is just to make sure that it drives forward in an effective way,” US President Barack Obama said.

Brazil's finance minister Guido Mantega, whose country eurozone leaders hope to see as one of the EFSF creditors, was even more cautious. "What worries me is the timeframe, if we have the necessary time for the plan's implementation if there is a deterioration in the world economy," he told reporters in Brasilia.

Heading into financing talks in Beijing, EFSF chief Klaus Regling on Friday conceded that he does not expect to reach a conclusive deal during his visit. But he added that China has been a constant customer for European bonds and hoped it will stay like that.

Banks around the world also issued cautious statements. Citigroup was "surprised" at the "enthusiasm" for the deal, "considering the lack of new detail." Deutsche Bank said the "final outcome crucially depends on the capacity to attract potential non-European investors" and France's Societe Generale saw the "long-term verdict" on the deal in the way bond markets react.

"It is premature to talk about containing the crisis when Italian 10-year yields were still dangerously close to the 6 percent mark and the positive initial reaction in currencies is probably the result of very low expectations," the French bank said.

In Brussels, Janis Emmanouilidis from the European Policy Centre thinktank also poured cold water on the enthusiastic reaction. The deal "is very complex and difficult to evaluate. It lacks a number of crucial details which still need to be elaborated, it leaves numerous questions unanswered, and it is by no means clear whether the overall package will stand the test of time," he said.

Polish leader Donald Tusk turned out to have given a good summary of the deal even before it was made.

"Everyone is impatiently awaiting the details but it's not the devil that's in the details, it's all of hell," he said before the marathon summit that started on Wednesday evening.

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