Cuando despertó, el dinosaurio todavía estaba allí. “Upon waking, the dinosaur was still there.”
This extremely short story by Guatemalan writer Augusto Monterroso sums up the state of play on the euro crisis. Last week’s summit took important steps to stop the immediate panic. But the big economies of Italy and Spain are shrinking and there is no agreed long-term vision for the zone. In other words, the crisis is still there.
The summit’s decisions are not to be sniffed at. The agreement that the euro zone’s bailout fund should, in time, be able to recapitalise banks directly rather than via national governments will help break the so-called doom loop binding troubled lenders and troubled governments. That is a shot in the arm for both Spain and Ireland. Meanwhile, unleashing the bailout fund to stabilise sovereign bond markets could stop Rome’s and Madrid’s bond yields rising to unsustainable levels.
Insofar as this restores investors’ confidence, Spain and Italy could avoid the need to obtain a full bailout or restructure their debts. And Ireland, which is in a full bailout programme, could exit that and fund itself in the market again.
The immediate market reaction on Friday was positive. The yield on 10-year bonds fell: for Spain from 6.9 percent to 6.3 percent, for Italy from 6.2 percent to 5.8 percent and for Ireland from 7.1 percent to 6.4 percent. But these rates are still high. And, with the exception of Ireland, Friday’s market movements only take prices back to where they were in May.