The European Union deal failed to assure the markets for long and jitters returned to European markets on Friday, wiping clean a previous rally on news of the deal.
Investors had shrugged off a warning by ratings agency Fitch that Greece may achieve the distinction of being the first western nation to default in 60 years and yields on the country’s two-year bonds saw their biggest fall since Greece joined the EU in 2001.
However, other markets that were closely watching for contagion, rallies petered out. The Euro dropped against the dollar while Spanish and Italian bond yields rose.
Andreas Utermann, chief investment officer at RCM, the equity fund management subsidiary of Allianz, said, said: “the trouble with all this is that the crisis will only be on its way to full resolution when it becomes clear the eurozone, and in particular the periphery have achieved satisfactory growth rates.”
Some investors were critical of the fact that Greece, Ireland and Portugal, all EU members to have received bail-out funding, have not been quarantined from Spain and Italy, in focus this week for signs of weaknesses.
“I want Europe to come out of the crisis stronger than it went in; it is our historic task to protect the euro. Europe without the euro is unthinkable,” said German chancellor Angela Markel, defending the EU’s decision for the latest round of funding.
The €109 billion bail-out package announced on Thursday is expected to reduce Greek’s debt burden by €26.5 billion from the current €350 billion.
“We would have argued for a 40 per cent haircut; the real mistake here is that EU regulators are not pushing the banks to raise capital, as happened in the US through the Tarp programme,” said Kian Abouhossein, an analyst at JPMorgan.
“The most important thing is that Greece should put its [austerity] programme into effect,” said Ms Markel arguing the latest funding would ensure that Greek economy became more competitive and the country’s debt burden sustainable.
However, there’s still lack of clarity as EU diplomats failed to explain the numbers behind the latest round of funding and the quantum of new money being infused in the Greek economy.