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Euro debt deal only short-term solution: analysts

27 October 2011, 12:54 CET
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(PARIS) - The deal clinched in Brussels to tackle Europe's sovereign debt crisis is a short-term step forward but unlikely to be enough to stop the crisis spreading in the long run, analysts said Thursday.

Global markets surged after the summit deal to fix Europe's debt crisis by shoring up a trillion euro bailout fund and pushing banks to share the pain, but analysts said question marks remained .

The deal "has the merit of validating a European framework, not to resolve the debt crisis, but at least reassures and (tries) to convince markets of Europe's collective will," said Barclays Bourse analyst Frankin Pichard.

The crisis that started in Greece two years ago has successively hit Ireland and Portugal and threatened to spill over to the euro area's third and fourth economies, Italy and Spain.

To address that danger, eurozone leaders agreed to bolster the European Financial Stability Facility (EFSF) rescue fund by up to one trillion euros, including with the help of China and Russia.

"The next meeting on November 3-4 (at the G20 summit in Cannes) should provide more details on how the new formula EFSF will function," said Pichard.

"We're also waiting for further indications on states' credibility, notably Italy and France, concerning their ability to reduce their budget deficits. Chaos has been distanced but the path is still long before crying victory."

The agreement includes a deal between eurozone leaders and banks to force private investors to take a 50 percent loss or "haircut", slicing 100 billion euros off the 350-billion-euro debt pile hampering Greece.

Greece also won new pledges of a 100-billion-euro loan over the next three years, but Elie Cohen, economist at France's National Centre for Scientific Research, said the deal was "clearly" insufficient to deal with the problem.

"What happened yesterday is the same as what's happened over the last two years: there's a summit that allows the immediate difficulty to be resolved."

Cohen said that the deal meant that in the best case scenario, Greece's debt would be 120 percent of its gross domestic product.

The banks' haircut "will allow them to absorb the shock linked to the Greek loss, but will it be enough to absorb the shock of a partial default by Spain or Italy? The solution has simply been postponed."

Chris Wheeler, analyst with Mediobanca in London, described the deal as "another step forward but not an out-and-out solution".

"There's been an agreement between various euro governments, that's vitally important and they've leveraged up what's left of the EFSF into a trillion," Wheeler said.

"It's not the bazooka people have talked about, it's more a sort of light submachine gun so far, but obviously it's been very welcomed by the market that it is in place, now we see the banks where the capital shortfall is."

"The fact that people actually agreed to try and get this sorted out is what's cheering the market today," he said, while pointing to banks' shares that are undervalued because of question marks over their debt exposure.

"That tells you something, that's not going to change overnight, there's people still worried about where they are going to get their capital and what other issues are going to come out of the final terms of this," he said.

Main results of Euro Summit

EURO SUMMIT STATEMENT


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