Eurozone deal prompts equity rally but doubts remain

EurozoneStock markets are rising after European leaders signed a deal at 4am today to impose a 50% haircut on privately held Greek bonds and increase the lending power of the European bailout fund to €1 trillion or more, using leverage.

The deal followed an earlier decision to recapitalise Europe's banks.

The FTSE 100 climbed 2% in response to the news while Germany's Dax and the French Cac 40 each gained more than 3.5%. Commodities and the euro also rose while yields on safe haven treasuries fell.

However, there are still gaps in the agreement that need to be filled when the summit reconvenes in November and fund managers are concerned that the spotlight will shift to Italy.

“The eye of the storm will now move to Rome and its fragile government. I don't think yields on Italian debt will fall on the back of this agreement for long,” said Dominic Rossi, global chief executive officer for equities at Fidelity Worldwide Investment.

“My overall view is that the deal isn't the game changer. Italy's 120% debt-to-GDP doesn't look any more sustainable today than yesterday,” he added.

Rossi was also sceptical about the plan to boost the lending power of the European Financial Stability Facility (EFSF), the bailout fund, with leverage.

“Unless the fund has a sound equity base I think it is a heroic piece of financial alchemy,” he said. “It's effectively an insurance company selling protection against its own default.”

Many are hoping that China will invest some of its $3.2 trillion (€2.3 trillion) of foreign exchange reserves in bonds issued by the EFSF. French president Nicolas Sarkozy has reportedly said he plans to call Chinese president Hu Jintao to discuss a contribution.

©2011 funds europe