Following a late-night agreement by EU leaders aimed at drawing a line under the sovereign debt and banking crisis, one analyst warned that Germany now looks increasingly isolated.
“It is clear that the agreement was only forced out of Germany under extreme duress. As a result, Germany now looks both politically isolated and, presumably, extremely annoyed. That would seem a dangerous combination,” said Simon Derrick, the head of currency strategy at Bank of New York Mellon said on Friday.
Noting that an agreement to allow funds to be injected directly into Spanish bankswithout impacting Spain’s sovereign debtposition is a positive, Derrick believes the deal fails to address a number of key issues.
“It needs to be remembered that the agreement reached does not address the structural issues within the euro area that created the crisis in the first place. Instead, it simply shifts the burden of the outcome from the local sovereign to the bailout funds , which, in reality, means the nations of northern Europe — principally Germany,” said Derrick in a research note.
“Derrick also believes the loosening of conditionality rules will set the stage for Italy to request support. “Should this happen then over one third of the members of the area will have had to seek support in one form or another,” said Derrick, who notes absolutely nothing has been done overnight to address the problems facing Greece.
“With the nation reportedly set to run out of money on July 20 and German officials warning yesterday that the troika’s audit of Greece’s performance will likely take weeks rather than days, this remains a non-trivial risk,” said Derrick.