What exactly happened in European summit?

Even the participating national leaders seem a little confused about some of the outcomes.

By Jim J. Jubak Jun 29, 2012 2:32PM
Image: Europe (© Corbis)You're excused if you don't know exactly what European leaders decided at the end of Friday's summit -- they can't seem to agree either -- or what the actual effect might be. The financial markets are positive but confused.

In the broadest outlines, European leaders agreed on the following:

1. The eurozone's bailout funds can be used to inject capital directly into struggling banks without being funneled through national central banks, which would add to national budget deficits. The agreement clearly includes Spain. It might expand to Ireland. Italy? Unclear but it seems like not at the moment. 

This direct injection of capital, however, seems like it will only be possible after the creation of a eurozone-wide bank supervisor. (See item No. 2 below.)

2. A eurozone-wide single bank supervisor will be created for all banks, replacing the current regime in which each country's banks are governed by the country's national bank or national bank regulators. German Chancellor Angela Merkel has said that she expects a proposal on how to do this by the end of 2012.

3. Loans to Spain from the permanent bailout fund, the still-to-be-ratified (Germany was scheduled to vote on this Friday) European Stability Mechanism, will not have seniority to other, private bondholders. This is hugely important, since giving seniority in the case of a default to eurozone institutions would have resulted in more private investors fleeing the market for Spanish debt.

4. Countries that use the bailout fund to buy their debt will not have to submit to a full Greek-style monitoring program. At least, that's what Italian Prime Minister Mario Monti thinks the summit agreed. Other officials, at the European Commission, for example, are still talking about "very strict conditions." Monti has said that the troika (European Commission, European Central Bank, and the International Monetary Fund) won't be involved in deciding when a country gets a bailout or what the terms might be. Both Germany and France say it will.

And what didn't the summit do? The eurozone still doesn't have a roadmap to fiscal integration, or to a banking union (including eurozone-wide deposit insurance.)

The growth pact is the same meager $120 billion, most of it already budgeted money, that looked so inadequate when it was first proposed.

The existing European Financial Stability Facility still has to raise its money in the financial markets (since it wasn't given a banking license and thus can't tap the European Central Bank) and the new permanent European Stability Mechanism, the replacement bailout fund, doesn't yet exist and is still limited to 500 billion euros in size. That amount was seen as too small to bailout Spain and Italy before the summit. It is still too small today.

This isn't to say that the summit didn’t produce anything of significance. The move to inject eurozone capital directly into Spanish banks is a major step toward treating the obligations of eurozone banks as obligations of the eurozone as a whole instead of individual national governments.

But nonetheless, this summit did very little but buy time. Past summits and agreements have done that as well only to see the eurozone's leaders squander that time.

The big problems remain and the clock is still ticking on the depressed Spanish and Italian economies.

The headlines -- "How Italy and Spain Defeated Merkel at EU Summit" in Germany and "Super Marios" in Italy, a reference to the defeat of Germany at the summit by Mario Monti and in the European soccer tournament after two goals by Italy's Mario Balotelli -- do give Monti enough of a success, in my opinion, to fend off an immediate move by Silvio Berlusconi’s People of Liberty Party to bring down the government and force an early vote.

But after Friday’s rally on relief that the summit produced anything, I think the markets are likely to discover that the problems existing before the summit still exist after the summit. I'd take profits (if any) here from swing trades or in positions that you don't want to hold for the rest of the summer.

It's just a question of how long the euphoria takes to wear off (and that will depend in a good part on the news flow out of the Chinese and U.S. economies in the next few weeks.)

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

10Comments
Jun 29, 2012 3:11PM
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American and European debt crisis - either pay down the debt or take bankruptcy. This political and economic maneuvering is just lying to ourselves.
Jun 29, 2012 4:37PM
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How about this?  European leaders go long on securities.  Then, they announce they've had a productive meeting.  Dow up over 200, sell securities.  Then short securities.  Then, announce they've broken off talks with Greece.  Dow down 200, pull the short trigger.  Then, go long.  Then, announce that they have had a very productive meeting.  Dow up 200.  Sell.  Then short again.  Then, announce they've broken off talks with Spain.  Dow down 200, pull the short trigger.

 

Lather, rinse, repeat.

 

 

Jun 29, 2012 3:23PM
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Socialist don't understand that socialism cost money. They believe that the good fairy is paying the bill. Socialism will always end in bankruptcy.
Jun 29, 2012 3:32PM
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The clock has been ticking for a long time.  This is one of the world-class stalls.  Reminds me of President Nixon promising to end the Vietnam war.  How long does it take these people to move their money out of Europe and sell their last few munis for pennies on the dollar?  They need high-speed trading like we got.  Jim is right.  Cash is king.  Keep your powder dry.

 

 

Jun 29, 2012 4:22PM
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The developed nations are out of time.  We have past the point years ago.  Nothing can stop market forces from liquidating debt levels and pushing asset prices down.
Jul 4, 2012 11:05AM
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2. A eurozone-wide single bank supervisor will be created for all banks, replacing the current regime in which each country's banks are governed by the country's national bank or national bank regulators. German Chancellor Angela Merkel has said that she expects a proposal on how to do this by the end of 2012.

 

Remember the golden rule - whoever has the gold rules.   This is a scary amount of power for one person to have!

Jun 29, 2012 6:20PM
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People like to think that it is a matter of picking the right system and everything will work out on its own. It will not. To make it work is a matter of daily responsibility and proper decisions.
The European economies are not socialist economies. They are market economies with social safety nets. The social nets are theoretically the same in northern and southern Europe, yet the northern countries can maintain them while the southern cannot. In US we do not have even 1/10 of the social safety nets, yet we have the same, if not worse debt problem. Even here some states are able to provide the same services in budged while others are in debt. There is a lot of excess in Europe, especially in the indebted countries but I do not think that providing some kind of basic health care, retirement and eduction to everybody will make us socialists.

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