A Breakdown Of The Eurozone Plan

Includes: EWI, FXE, GREK
by: Pragmatic Bear

The Main Focus

The EU leaders failed to get a consensus of the 27 member nations in terms of treaty changes to tighten the union’s fiscal coordination. Instead they have decided to form a pact that will tighten the rules on national fiscal policy. So far 23 of the 27 nations have agreed to this understanding. There are rumors that it could be as many as 26 by later in the day Friday. Also, all 17 members using the euro have agreed to this accord. The UK was an outspoken opponent of this idea. This was made absolutely clear by Prime Minister David Cameron when he stated, “We’re not in the euro, and I’m glad. We’re never going to give up the kind of sovereignty that these countries are having to give up.”

The “Pact”

  • Unprecedented intervention in national budgets
  • Countries that run deficits of more than 3% will be sanctioned
  • Countries submit budgets to a European commission
  • Governments will have balanced budgets with a deficit no greater than 0.5% of GDP. Must amend constitutions to reflect this requirement
  • The countries also agree to provide 200 billion Euros to the IMF to the nations in trouble

Markets' Reaction

A quick glance at the European markets shows a mixed reaction. The major indices of the continent are all in positive territory. However, the yields on Italian 10 year government debt (which everyone seems to be watching as a barometer) have jumped up. They are begging to rise back toward the dreaded 7% level. This is troubling, as it is the level where the other European sovereigns (Greece, Ireland, and Portugal) were forced to accept bailout plans. Currently the Italian 10 year bonds are yielding 6.546%. The United States futures are opening in positive territory with the Dow gaining about 53 points and the S&P adding 6.80 points. It should be interesting to watch these numbers as the EU summit continues throughout the day.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.