Markets Cheer But Questions and Doubts Remain After EU Debt Deal

By: EW News Desk Team   Date: 28 October 2011

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EW News Desk Team

Always on the look out for the latest news to monitor the state of the world economy.

EconomyWatch, News Desk Team

 

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28 October 2011

Bourses worldwide have surged following the European debt breakthrough, but economists warn that the deal falls short of a permanent solution.

The markets are clearly relieved after the good news from Europe.

Related: EU confirms 1 trillion euros bailout fund, 50% Greek writedown

The Dow Jones Industrial Average (+2.9%), S&P500 (+3.4%) and Nasdaq Composite Index (+3.3%) all rose at market closing yesterday, with the S&P500 extending its biggest monthly rally since 1974. The DJIA too, rose above 12,000 for the first time since August 1, closing at 12,208.5 for the day.

European equity markets also rallied, with Germany’s DAX stock index jumping 5.4% and FTSE100 up 2.9%, while U.S. stock index futures pointed to a higher start for Wall Street. The euro rose, topping the $1.40 level versus the dollar for the first time since early September.

In Asia too, the Nikkei 225, Hang Seng Index, Shanghai Composite Index and other major bourses were trading in positive territory, mirroring the trends in American and European markets.

“The most positive news was after months and months of wrangling, European leaders reached broad agreement,” said Alan Skrainka, chief investment officer at Cornerstone Wealth Management, of the effort to contain Europe’s debt crisis.

“The market jumped because of the Europe news, but what shouldn’t be lost is a very is a very solid report on the economy. It’s not very robust, but it’s a far cry from recession,” said Skrainka of the Commerce Department report, which found the U.S. economy grew 2.5% in the third quarter.

But many economists and skeptics have raised questions over the longevity of such celebrations.

Nouriel Roubini tweeted this morning, "Little in EZ (editor: eurozone) plan to restore growth/competitiveness. Without it financial schemes (greek haircut, bank recap, levered EFSF) alone will fail."

Related: Eurozone divorce imminent – Nouriel Roubini

Related: Europocalypse: Are the days of the eurozone numbered? – Nouriel Roubini

In Germany, Deutsche Well reported mixed reaction in the German parliament, with the opposition Social Democrats criticizing the latest measures for being long overdue.

"It will make no big difference. It will not solve the problem we are facing," said Matthias Kullas, an economist at the Center for European Policy in Freiburg, Germany. "It will buy us more time, but it's the opposite (of a solution): The reduction of the debt in Greece will make it easier for them not to implement the necessary reforms because there is less pressure now."

Analysts believe that no one can with certainty that the package will work.

"It is clearly a step in the right direction," said ING economist Carsten Brzeski. "But we still have a couple — many too many — unanswered questions, especially on the (bailout fund). It was clearly not the final summit, the final word, the super-duper master plan that Sarkozy promised us.

 


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