MacroScope

This time it was going to be different. A make-or-break, comprehensive, grand, “bazooka” solution would draw a line under the euro zone debt crisis.

But the plan agreed by all EU states except Britain to pursue stricter budget rules and a stronger fiscal union did little to soothe bond markets. Ten-year Italian yields rose as far as 6.8 percent, prompting the European Central Bank to intervene in the secondary market, and German Bunds rose more than 100 ticks on the day.

Among the short-falls, the capacity of the euro zone’s bailout fund was capped and it was not granted a banking license. For now, this puts more pressure on the European Central Bank to help contain the crisis by stepping up bond-purchases. The bank however has repeatedly resisted a bigger crisis-fighting role and last week dampened expectations that it could ramp up a program which has tried to keep borrowing costs affordable. The legal basis of a new accord to enforce debt and deficit rules also still needs to be worked out.

Analysts at Societe Generale:

The outcome of the EU summit may be good enough to keep the holiday season from being spoiled by nasty market disruptions. But we fear that it is not the bazooka that can carry us to the wall of Q1 supply with much confidence.

The euro zone’s funding needs are estimated at more than 800 billion euros next year, and 215 billion euros for Italy alone.

Charles Diebel, head of market strategy at Lloyds Bank says:

The euro zone coming up with a plan to move towards some form of strict Maastricht (fiscal limits) is a step in the right direction but what you don’t have is the ECB support and likewise you don’t have this move towards a transfer union, which ultimately I still think is going to be necessary for it to be viable.

There are some lingering hopes that if things get bad enough the ECB could change its mind and step up bond-purchases. The central bank slashed such purchases in the run-up to last week’s summit, data showed on Monday. It has capped the maximum purchase of sovereign euro zone debt at 20 billion euros a week for now, ECB sources told Reuters on Friday.

But lofty expectations have gotten markets in trouble before.

“It’s amazing how investors are always hoping for the best. I can’t believe that they get punished so many times and don’t get it,” Nicole Elliott at Mizuho said.

Now the question is whether the EU summit was enough to stave off the mass downgrade on sovereign ratings threatened by Standard & Poor’s, including those of France and Germany.

Comments by S&P’s chief economist that time was running out for the currency bloc to resolve its debt problems and that it might take another financial shock to get it moving were not particularly reassuring.