EU
summit fails to lift European markets as French President Nicolas
Sarkozy sees birth of new sort of Europe and Italian and Spanish
borrowing costs rise
| MARIUS ZAHARIA and MATTHIAS BLAMONT |
|
Published:
2011/12/12 04:06:51 PM
|
A European summit deal to strengthen budget discipline in
the euro zone failed to restore financial market confidence on Monday,
forcing the European Central Bank (ECB) to step in again gingerly.
The euro fell, stocks slid and borrowing costs for Italy
and Spain rose as investors weighed the outcome of last week’s summit
that split the European Union, with Britain blocking treaty change and
forcing euro-zone countries to negotiate a fiscal accord outside the
union.
Friday’s initial market rally petered out in less than 24
trading hours due to legal uncertainty surrounding the new pact and the
absence of an unlimited financial backstop for the single currency.
French President Nicolas Sarkozy said the legal basis of a
new accord to enforce debt and deficit rules in the 17-nation euro area
with quasi-automatic sanctions and intrusive powers to reject national
budgets would be worked out before Christmas.
"In the next fortnight, we will put together the legal
content of our agreement. The aim is to have a treaty by March," Mr
Sarkozy told Le Monde newspaper in an interview.
"You have to understand this is the birth of a different
Europe — the Europe of the euro zone, in which the watchwords will be
the convergence of economies, budget rules and fiscal policy, a Europe
where we are going to work together on reforms enabling all our
countries to be more competitive without renouncing our social model,"
he said.
Traders said the ECB intervened to buy short-term Italian
debt after yields on Italian and Spanish debt spiked. But ECB sources
said last week that purchases would remain limited with a maximum
ceiling of €20bn a week.
There is no prospect of a "big bazooka" to shock the markets.
Despite the central bank dabbling, Italian five-year bond
yields shot up above 7%, widely seen as a danger level, while 10-year
yields spiked above 6,8% and Spanish 10-year yields topped 6%.
Investors’ appetite for short-term paper drove Italian
one-year borrowing costs down just below 6% at an auction but yields
remain uncomfortably high.
"Let’s not raise expectations too high. There will be more
summits," said Jean-Michel Six, chief European economist at Standard
& Poor’s, the rating agency.
"Time is running out and action is needed on both sides of
the equation, on the fiscal and monetary side," he told a business
conference in Tel Aviv.
S&P has put 14 euro-zone governments on watch for a
possible rating downgrade in the coming weeks, arguing that the
deepening debt crisis and looming recession will increase their
potential liabilities and reduce their ability to cope with them.
If some of the euro zone’s AAA-rated members are
downgraded, it would call into question the solidity of the euro zone’s
rescue fund, which would be likely to suffer a similar fate.
"There is probably yet another shock required before
everyone in Europe reads from the same page, for instance a major German
bank experiencing difficulties in the market," Mr Six said. "Then there
would be a recognition that everyone is on the same boat and even
German institutions can be affected by this contagion."
Interbank lending rates in the euro zone fell to their
lowest level since May after the ECB threw cash-starved banks a lifeline
last week by offering unlimited three-year liquidity to counter a
credit crunch.
POLITICAL FALLOUT
Political aftershocks from Friday’s historic rift between
Britain and the rest of the 27-nation bloc continued to shake Europe on
Monday, with Prime Minister David Cameron facing tension in his
coalition and doubts in the business community.
Mr Cameron was assured of a hero’s welcome from
eurosceptics in his Conservative party in Parliament but faced a
backlash from his Liberal Democrat coalition allies when he explains a
veto that has cast Britain adrift from its continental partners.
Lib Dem Deputy Prime Minister Nick Clegg said on Sunday he
was "bitterly disappointed" with an outcome that would diminish
Britain’s global influence and was bad for jobs and business.
In business, the chief executive of the world’s largest
advertising group, Martin Sorrell of London-based WPP, said Britain’s
interests would be better serviced "inside the EU tent" than on the
sidelines.
In Brussels, officials were groping for a strong legal
basis for the planned fiscal compact, with Britain arguing that the euro
zone cannot use the EU treaty institutions — the European Commission
and the European Court of Justice.
European Economic and Monetary Affairs Commissioner Olli
Rehn said most of the practical measures to strengthen budget
enforcement could be implemented immediately under a set of rules known
as the "six-pack" agreed in October.
Euro-zone finance ministers may hold an extra meeting
before the end of the year to try to nail down details of the agreement
before their winter break, diplomats said.
The euro area faces the next potential crunch point in
mid-January when Italy, which has a debt mountain of €1,9bn or 120% of
its annual output, has to start issuing tends of billions of euros in
bonds towards a 2012 total of €340bn needed to roll over maturing debt.
Michael Leister, rate strategist with German bank WestLB in
Duesseldorf, said the summit outcome had done little to restore
confidence in the absence of stronger central bank action.
"The question is, will this help to stabilise sentiment? I
don’t believe so, given that those comments from (ECB president Mario)
Draghi ruling out a bazooka during the ECB conference are still weighing
on spreads," he said.
REUTERS
