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Euro zone pact fails to boost sentiments

business Updated: Dec 12, 2011 20:46 IST

Reuters
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Last week’s Europen Union (EU) summit went a long way towards forging the closer economic ties needed to prevent future debt crises but markets are likely to judge it as too little and too late to solve the current one, and as on previous occasions the measures are unlikely to calm investors for long.

EU leaders ended the summit with a deal to draft a new treaty for deeper integration in the euro zone, but analysts and policymakers remained sceptical such long-term steps could solve the crisis.

While German chancellor Angela Merkel said she didn’t expect leaders would meet again before Christmas, a EU official said he thought market pressure would compel them to meet again sooner.

Global stock markets rose on Friday but Italian borrowing costs came under further pressure. Price action in the coming week will deliver a more considered verdict.

“The moves by the euro zone policymakers are not a damp squid but neither are they the big bazooka hoped for that could really ease market tension for an extended period,” said Howard Archer, economist at IHS Global Insight.

EU leaders agreed to lend up to €200 billion to the IMF to help it aid euro zone strugglers, bring forward the permanent rescue fund European Stability Mechanism (ESM) by a year to mid-2012 and leverage the existing European Financial Stability Facility (EFSF).

However, it is still months until the ESM comes into force and global investors seem keen to pay into the EFSF.

Add to that the Damocles' sword of a Standard and Poor’s rating downgrade hanging over euro states, which would also likely prompt a downgrade of the EFSF’s credit worthiness, and the available funds could well fall short of needs again.