Analysis: No "grand bargain" means more euro stress

Fri Dec 9, 2011 11:03am EST
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By Noah Barkin

BERLIN (Reuters) - The euro zone has agreed to take a big leap forward in economic integration, but failed to deliver a convincing answer to investors worried about its ability to tackle threatening debt crises in Italy and Spain.

As a result, the deal clinched by European leaders in the early morning hours of Friday seems unlikely to ease the intense financial pressures that have plagued the currency bloc for over two years. Nor will it dispel concerns that the euro area could eventually break apart, with one or more countries exiting despite the catastrophic consequences that would entail.

With Britain, the EU's third biggest economy, opting out of the fiscal process, questions about the cohesiveness of the wider bloc will also be posed.

Perhaps the most significant new element of the agreement sealed in Brussels was a green light for the euro area to provide the International Monetary Fund (IMF) with up to 200 billion euros in bilateral loans.

These funds could be used to extend precautionary credit lines to Italy and Spain, the euro zone's third and fourth biggest economies, helping them muddle through a debt refinancing crunch in the first quarter of 2012.

But barring a rapid return of investor confidence, these resources will provide Rome and Madrid with only a temporary respite, leaving markets jittery, and Italy at least has shown a marked reluctance to accept IMF help.

"It's not the grand bargain some people had been hoping for," said David Mackie, an economist at J.P. Morgan in London. "A door has been opened with the IMF channel, but some people may say that 200 billion euros is simply not enough."

Stock markets headed higher on Friday but bond markets pushed Italian borrowing costs up. Yields on 10-year Italian bonds rose above 6.5 percent, closer to levels that are viewed as unsustainable, having dropped below 6.0 percent earlier in the week.   Continued...