We’re hearing mixed reviews from analysts about the agreements EU leaders came to last nigh.Regardless, most seem to agree on a few major points:
- There was progress, albeit limited. Those strides were primarily made in plans for private sector involvement and bank recapitalization.
- The big problem right now in Europe is still growth.
- Everyone’s still disappointed that we’ve heard few details on a plan to leverage the EFSF.
- EU leaders did not take big enough steps towards fixing problems of economic and political governance in the euro area.
On the whole, analysts welcomed progress made to stem the crisis, saying that it constituted an important step forward. Nonetheless, they agree with our assessment that crisis resolution has a lot farther to go.
Bank of America: Analysts seem to have gotten equities wrong, but give a pretty consensus picture of the amount of progress we’ve seen. They also pointed out that the €106 billion ($147 billion) we’ve seen on bank funding overstates the amount of aid banks will actually see from national governments and the EFSF:
With announced schemes largely in line with investor expectations, and many of the pertinent decisions postponed until November (EFSF leverage and Italian structural reform agenda), we don’t expect a dramatic reaction in bank shares tomorrow. A meaningful commitment from China to participate in a European solution could provide an upside surprise.
Credit Suisse: Economist Stephanie Deo, who entitled her note “They did it!”, takes a more optimistic approach:
After 2 years of crisis, 10 European summits and also 10 hours of negotiation yesterday night, European leaders have finally managed to deliver a major step on the crisis that will probably be taken positively by markets…
This is not yet the jump to fiscal integration that has been prepared behind doors in the past few months. We would definitely not believe this is the end of the crisis nor the end game solution.
Citigroup: Economist Willem Buiter took a much more cynical approach. He was particularly upset about the deal on 50% haircuts of Greek bonds, which has — to date — failed to trigger a credit event. Buiter even argues that, if CDS contracts are not triggered, the whole framework of the eurozone could come toppling down:
For instance, the success of the proposal that implies that the EFSF provided (first-loss) guarantees for new issuance of EA sovereign debt in the primary market relies on the belief of market participants that such guarantees would actually be honored in the future. Avoiding CDS payouts on technical or legalistic grounds could make any such assurances less credible. And even the original EFSF relies on guarantees by EA member states. Any action that undermines the credibility of promises by EA member states or the EFSF to honour guarantees thus has the potential to unravel the entire EA support architecture.