One more summit: The crisis rolls on

The EU summit produced a vaguely word agreement that can and has been read in different ways in different nations. This column provides a quick reaction to what was and was not decided. It concludes that useful progress was made, but this was far from the decisive turn-around that many had hoped for. The crisis will continue to unfold in the months ahead.

Reading the official documents from the June 28 summit requires linguistic and divination skills. The texts are convoluted and clearly aim at giving various positive impressions while shying away from deep commitments.

• The clearest result is that EFSF/ESM funds can be used directly to support banks.

The summit attendees seem to have successfully drawn the conclusions that this was necessary from the disastrous impact of their mid-June decision on new lending Spanish authorities to shore up their banks. Within hours, the main conclusion drawn by the markets was that the Spanish public debt had grown by €100 billion, bring Spain closer to the fate of Ireland (bad bank debt dragged down a government with an otherwise healthy fiscal position).
The new agreement suggests that in the future, banks will be bailed out by the collective effort of Eurozone countries. This means that should the bank rescue turn sour, losses will jointly assumed, in proportion to each country’s size – so, for examples, Greek taxpayers could take a share in poorly managed rescues of Italian banks. This is solidarity, but…

• First, this arrangement is to be finalised by the end of the year.

This means that, in the end, the Spanish debt will rise by €100 billion (the market participants who enthusiastically celebrated the decision by raising the price of Spanish bonds will eventually understand that). Ditto in the not unlikely case that some Italian or French banks wobble before December.

Read more: http://www.voxeu.org/article/one-more-summit-crisis-rolls