EU Summit – Business as usual?

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European Commission President Jose Manuel Barroso speaks during a media conference at an EU Summit in Brussels on Friday, 29 June, 2012. European leaders agreed to use the continent's permanent bailout fund to recapitalise struggling banks, and agreed to the idea of a tighter union in the long term. Photo - AP

Friday saw a spike in international markets, as Asia, Europe and America felt positively about the rhetoric coming out of the EU summit. All indexes gained and rallied while there were huge gains seen on the commodity markets as well with oil gaining a whopping 8%. Gold also caught up on some of the ground it had lost earlier in the week.

The proposals presented at the European Union summit included a rate cut for Greece and Spain and a recapitalisation programme for Spanish banks which secures their equity with the European Stability Mechanism Fund. Even though some officials have raised concerns over the matter, it is still seen by investors as a viable and safe option. The liquidity being pumped in to the system is what the deteriorating banks need, however, these are in the form of subordinated bonds which will deter private investors rather than encourage them. The proposals are seen as a mixed bag by everyone where the positives are seen to be cancelled by the negatives and lack of good reforms being considered or approved.

The markets seem to be coming down from the euphoria on Monday where markets were tentative for a more long term solution for the debt contagion crisis. Short term gains have shown that markets are have responded positively to the proposals presented, however, any long term gains will be based on the implementation of the ideas presented and how they perform in the months to come. The EU summit proposals come on the back of the Cyprus asking for bailout as well joining in with Spain, Greece, Ireland and Portugal.

The success of the summit can be seen in the fact that many of the parties involved got what they wanted with minimal of compromise and there are stepping stones which can perpetuate this progress in the future. Angela Merkel, who was opposed to the euro bond, got to keep her word while giving in on the ESM fund being given directly to the banks. This has decreased the leverage and seniority based finance that was being proposed going for a more hybrid equity solution to cover the dried up liquidity in the contagion.

However, the amount set aside for the fund and being injected does not constitute the whole bailout package for Spain. So the ECB will have to jump in at regular intervals to rectify the situation. This will act as a signal for the market and private investors and would be kept in check in order to analyse the success of the programme.

The markets will show their true expectations with the proposal presented after Thursday when the European Central Bank sits together to decide on the plan of action. At this point of time, they look tentative and any breakthrough in the range-bound bourses and commodities is expected to take place near ECB’s meeting. Only then will there be a clear distinction with regard to whether Friday was a one-off or a precursor of things to come. The summit announcement was a support that the markets needed at this time of uncertainty and they got the needed results. Now it has to be seen whether the plan will be put in place or not and how much will be put into place. Eyes are now set on Thursday to gauge how the markets will react to the solution that ECB has in mind.

Zain Naeem is the head of equity research at Maan Securities (Pvt) Ltd. He is a Lahore-based commentator with more than 3 years of experience in trading and research at the Karachi Stock Exchange and Lahore Stock Exchange. He enjoys writing and commenting on the finance front and presenting it to various audiences in different forums. Zain is deeply interested in politics, business and finance and is fascinated at how the three intermingle with each other.

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