Euro zone leaders have treated a symptom aggressively with their second bailout plan of Greece, but for many investors the underlying condition remains and could flare up again as soon as summer is out.
As Barclays Capital put it so succinctly on Friday morning: “More than expected but not enough to make us sleep comfortably.”
Investors will be heaving a sign of relief that a bailout was agreed, especially as it included some respite for Ireland and Portugal, beefed up the bloc’s future crisis-fighting mechanisms and did not wallop private bond holders too hard.
The morning-after mood was encapsulated by the euro rising around 1 percent against the Swiss franc.
The latter has been the safe-haven currency of choice during the debt crisis, a far better gauge of investor attitude than the euro-dollar rate, which carries a lot of U.S. debt baggage with it. The euro had lost as much as 13 percent against the Swiss currency since early April.
Risk appetite was already rising ahead of the decision, so Friday’s rather modest two-thirds of a percent rise on the pan-European FTSEurofirst 300 stock index .FTEU3, should be put in context as a nearly 3 percent rise in four sessions.
“The (bailout) plans are better than expected,” said Lukas Daalder, senior strategist at Dutch fund firm Robeco.
He added, however, that his firm had not been expecting much and that there are many issues still to be dealt with.
“There is an opening, but we are not there yet,” he said.
MACRO AND MICRO:
It would be churlish to suggest that the euro zone package has only put off the problem. Investors were surprised by its scope and did not appear to view it as merely another case of the bloc “kicking the can down the road”, as the cliche goes. On the contrary, some investors were lifted by proposed greater flexibility in the European Financial Stability Facility, which is seen as now providing some protection. “It tips the risk reward a bit more toward favoring risk assets because there is a new shield,” said Andrew Bosomworth, a vice president at PIMCO Europe. Evidence of that could be seen on 10-year Italian bonds, where the yield was down around 5.26 percent versus a record above 6 percent on Monday — arguably one of the triggers that got the EU moving at the summit.
Bailout countries Greece, Portugal and Ireland are flies on the donkey compared with what a bankrupt Italy would mean. But there remain major issues at both the macro and micro level that weigh against any market hope that the crisis will go away completely and stop acting as a global brake on risk appetite.
The micro is essentially a question of details. The European Union has a long history of reaching broad agreements and then getting tangled up in their implementation. Given the fury with which investors and financial markets had begun to react to delays in the run up to Thursday’s summit, any further squabbles would probably not be treated benignly.
“It is to be welcomed that the toolbox to tackle the crisis has been expanded considerably and made more flexible,” Michael Heise, chief economist of insurer Allianz, said in a statement to Reuters. “The key now is to press ahead swiftly with implementation of the decisions and not get bogged down in a row about the details.”
PATCHED UP:
The bigger problem for investors is that the agreement — for all its scope — is a patch up not a cure.
The peripheral countries of the euro zone have run into debt problems because the are hugely uncompetitive and cannot devalue their currency, the classic way of dealing with such a condition.
Neither of these issues changes as a result of the deal. Nor, for that matter, has the underlying attitudes of the electorates — Greeks furious at having harsh austerity imposed on them, for example, or Germans unwilling to pay the bills.
Alessandro Bee, an economist at Swiss wealth manager Bank Sarasin, reckons this means the crisis has not been solved and indeed could rise up again quickly if economic projections for Europe prove optimistic.
But that was not the main significance of the package. “The first task is for these countries to survive. They can do some body building later,” he said.
Implicit in this kind of thinking is that the euro zone’s prescription should tide the patient over for a while, but that the long-term prognosis will need to be revisited. For financial markets, that probably means a hiatus from euro zone crisis panic — perhaps with some increase in appetite for riskier assets.
But how long that lasts will depend on how long the peripheral economies, particularly Greece’s, can use the help they have been given to mend themselves and keep qualifying for the aid. “We can take vacation,” PIMCO’s Bosomworth said. “But come back in September when the next disbursement is due and it will be all eyes back on Athens.”