The euphoria following last week’s euro zone summit will not last as traders return to work and realize there are no “executable” proposals on the immediate horizon, according to an economist.
“(The) rescue of Euroland’s banks, public finances and economy is still not assured—not even remotely so,” Carl Weinberg, the chief economist at High Frequency Economics wrote in a research note on Monday.
Markets went into risk-on modefollowing Friday’s early morning deal on the debt crisis by EU leaders in Brussels. Stocks ralliedacross the world, bond yields for the likes of Spain, Italy and Ireland fell sharply and the price of oil jumped nearly 10 percent.
Weinberg conceded that there have been changes since the summit.
“The catalyzing, and most surprising, development at last week’s summit was a rebellion against the German position,” he wrote.
“Chancellor Merkel was forced to back down from her core position that no steps toward mutualization of fiscal responsibilities can be contemplated until fiscal discipline to German standards is ensured.
Merkel was facing a vote that evening on the European Stability Mechanism. Weinberg welcomed the decision to remove the ESM’s senior status as a creditor, which he believes “would debase the sanctity of sovereign bonds as the safest of all assets.”
The other major change on Friday was the assertion that EU leaders are now committed to do what is necessary to ensure the financial stability of the euro zone by using the European Financial Stability Fund and the ESM in order to stabilize the bond markets of member states.
The European Central Bank has agreed to serve as an agent of the EFSF and ESM to conduct market operations and Weinberg warned “no one knows what this means.”
“It could mean that the summit has authorized EFSF and ESM to buy bonds directly from the market to stabilize prices, perhaps with execution by the ECB,” he said.
Weinberg is now watching to see if the ECB steps in to buy Italian and Spanish debt on behalf of the EFSF or ESM.
“We need to know how and when a bank supervisory function can be established at the ECB. We need assurance that purchases of bank shares are intended, not loans to banks or the governments. We need to know what conditions will be imposed on the banks seeking a bailout, will board seats be given to the ECB, salaries capped, dividends trimmed? And who will vote in the newly issued shares. Every aspect of these bold proposals remains unresolved, they are un-actionable” said Weinberg.
“We do not see how we get an instant action plan out of last week’s agreement.”