2nd July 2012
In a nutshell, there were two main tenets to the agreement forged at the summit. The bailout of the Spanish banks: "The agreement will result in EU bailout funds eventually being injected directly into teetering Spanish financial institutions, meaning Madrid can sweep the burden of the bailouts off its sovereign books."…and the new regulator: "The rescue for Spain's banks will only come after the creation of a single banking supervisor to be run by the European Central Bank."
The Eurozone members issued the usual PR statements about the agreement being a triumph, but perhaps the most unequivocal response came from Ireland. The Irish government declared the agreement to be a ‘game-changer'. It said it would help it return to international bond markets and meant it should escape the need for a second bailout.
With a more objective eye, Keith Wade, chief economist at Schroders believes progress was made: "The summit addressed one of the key issues – sovereignty. Previously, when intervention took place, it was clear that existing investors would be subordinated. They would be the last in the queue to get their money back. This was one of the things that they addressed at the conference…and was the main reason there was a rally in yields."
He says that there still has to be conditionality to any intervention and the fiscal compact is essential, particularly for Germany to protect its interests. He believes Angela Merkel will succeed in getting the new agreement through the Germany parliament.
Wade also suggests that the agreement showed a more assertive Italy and Spain. With the election of President Hollande in France, the outlook has changed to more resolutely pro-growth.
But there are those who suggest the optimism may be overdone. Shaun Richards, for example, is sceptical about the euphoria surrounding the deal. He agrees that resolving the issue of seniority was important: "This may seem technical but if you are buying a Spanish government bond you will not like a situation where, with apologies to George Orwell, some bonds are more equal than others. Because should matters deteriorate further you would have to shoulder more of any default or debt haircut burden if official holders of bonds can step aside."
His argument is that much of the agreement was nothing new. A few weeks ago everyone thought a bank bailout was being arranged for Spain anyway. He also believes that markets will not separate bank debt from sovereign debt in the way hoped by policymakers.
The Wall Street Journal suggests a more gloomy interpretation: "Another way is that the deal puts Europe's remaining solvent states on the hook for more of the debts of the southern periphery. That may soon include France and its 90%-of-GDP sovereign debt."
The piece also points out the limitations of a banking union: "The banking union piece of the agreement…should be met with some skepticism. Spain will get relief from bailing out its banks, which will instead be able to borrow directly from the European Stability Mechanism.
"That might not be the worst idea in the world-if the planned new regulator is able to impose real discipline on the banks in return for this backstop. But will the ECB really be willing to shut down the losers, fire the management and so on from Frankfurt, if Madrid won't do it now?"
The comment boards were also quick to reflect on the problems such a union might encounter. For example, Paul Shang wrote: "ECB can shut down a bank but who is going to pay depositors? How will the depositors live and pay their bills without their bank accounts? If Europe is trying to establish supervisory systems like FED and FDIC, it will take them 100 years to get it right. By that time, Europe won't be around. Barbarian will rule!" Another asked, not unreasonably, who would bailout Europe when Germany's coffers had run dry.
There were undoubtedly good decisions that came out of the summit. However, a long-term solution still seems some way away. This may have been progress, but there is still a hill to climb.
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