Agreeing to Agree to Do Something Really Serious
The EU summit statement lacked any of the details or enforcement mechanisms that we wanted to see.
Credit spreads were almost unchanged on the week as the Morningstar Corporate Bond Index tightened only 1 basis point to +251. The tone of the credit market was cautiously optimistic after the European Union (except for the United Kingdom) announced the agreement among member nations to improve fiscal discipline. The framework would integrate balanced-budget rules into each individual member's constitution with automatic correction mechanisms, provide for automatic consequences upon excessive deficits, and implement new rules to oversee draft budgets and correct excessive deficits.
Investors' enthusiasm was muted, however. They have been through this same situation too many times before. With each prior announcement the markets initially rose, only to decline a short while later as the plan was found to be lacking. The statement made by the EU contained few details other than that the members agreed to agree to create the framework over the next few months, with signing in March 2012. Unfortunately, the statement lacked any of the details or enforcement mechanisms that we wanted. Enforcing fiscal austerity and requiring structural reforms will be the key to the efficacy of this plan over time. However, as we opined last week, at least the politicians are taking the first step--albeit the first down a very long road--to address the underlying cause of the crisis, as opposed to merely addressing the symptoms.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.