Europe Economy

EU Crisis Resolution on Sunday Uncertain: Analysts

Markets seem to be increasingly optimistic that Sunday's European Union summit will help provide some sort of resolution to the euro zone's well-documented problems.

There have already been plenty of moments in the past few months which were flagged as crucial turning points in advance, only to turn out to be damp squibs.

July's second Greek bailout, September's EU finance ministers meeting, where US Treasury Secretary Tim Geithner showed up, and almost every time German Chancellor Angela Merkel and French President Nicolas Sarkozy came within 100 miles of each other have caused hope, followed by inevitable disappointment. Meetings proved to be just another step on the road rather than a leap into the end zone for the debt crisis.

Despite this, the FTSE, the DAX and the CAC indices all shot up Wednesday. A report in the UK's Guardian newspaper claiming thatFrance and Germany have finally reached agreement on another hike in the value of the European Financial Stability Facility (EFSF) fueled optimism in the markets when it was published online on Tuesday afternoon.

"This looks increasingly like an "all in" round of betting in a hand of poker – the market better hope it is right,"Steen Jakobsen, chief economist at Saxo Bank, wrote in a research note.

German officials have tried to dampen expectations this time around, with a spokesman for Merkel saying Monday: "The chancellor reminds [everyone] that the dreams that are emerging again, that on Monday everything will be resolved and everything will be over, will again not be fulfilled."

The meeting's agenda could include bank recapitalization, whether there should be a further haircut on Greek debt and whether raising the European Financial Stability Facility (EFSF) to 440 billion euro ($601 billion) is enough to deal with the region's troubled economies.

"There's no funding for the EFSF except on an as-needed basis," Carl Weinberg, chief economist at High Frequency Economics, told CNBC Wednesday.

"Until this thing is funded, they can debate about it until the cows come home, and no one's going to be convinced."

He believes that the EU should "send in the technocrats" to resolve the crisis.

José Manuel Barroso, president of the European Commission, said Wednesday that Europe is at a "crucial, decisive moment" but added that the summit "won't be the end of all our troubles."

There has also been plenty of bad news around Europe to temper expectations. French/Bund spreads over 10 years hit a 19-year high of 112bp yesterday over concerns that France might lose its coveted AAA credit rating.

"France might be downgraded, but I don’t think it would weaken its position in the negotiations. It's still a pretty strong country," John M. Hydeskov, chief analyst at Danske Markets, told CNBC Wednesday.

Moody's, the ratings agency, cut Spain's rating 2 notches to A1 from Aa2.

"We have had a couple of days where the market has started off very positive or negative, and then ended up as the opposite by the end of the day," said Hydeskov.

Jakobsen predicted more "extend-and-pretend" measures from euro zone leaders, but believes that they will eventually be forced to "destroy" Greek debt.

"Forget EU summit and G20… the only thing we can hope is that we see some element of reality – haircuts on Greek debt - enter the discussion, which could, just could be the lead point of the wedge of reality that eventually pries us loose from the extend and pretend process and leads us more directly to Crisis 2.0 – the needed turning point upon which a better future hinges," he wrote.

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