While the euro zone leaders’ summit certainly exceeded expectations, the shift from dire pessimism to elation in the Irish press reaction over the last few days seems overdone. The big question across numerous articles seems to be how much of the €63 billion put into the banks will now be mutualised. Unfortunately, I don’t see anything in the post-summit statement that leads me to revise a view that the chances of other European countries absorbing already crystallised losses in the Irish banks are approaching zero – the “similar treatment” statement notwithstanding. More positively, the chances of beneficially refinancing the promissory notes/ELA arrangement looks to have increased, which (depending on the details) could lead to a large NPV benefit, and thus significantly reduce the burden of banking-related debt. While this might partly explain the fall in bond yields, my guess is that the majority of the fall reflects a decline in the chances of a major euro zone crisis following financing difficulties in Italy and Spain. Excessively hyping what has been achieved runs the risk of later disappointment, undermining support for unavoidable adjustment efforts.
Another worry is that the triumphalism on display following the summit runs the risk complicating German politics on risk sharing. Thus far, the German government has moved incrementally, slowly bringing a sceptical electorate along with them. The perception that “Merkel blinked” could lead to a backlash.
So, yes, Friday morning brought some very welcome news. But there remains a hard slog ahead.