So Much For That Summit, Markets Have No Faith In Euro Deal

It seems anything short of a �big bazooka� aimed at the European debt crisis will fail to satisfy the markets.

On Friday the markets jumped on news of a Eurozone deal that would strengthen  the fiscal policies of member nations. Today though that deal didn�t give markets much to cheer about.

The Dow Jones Industrial Average shed 161 points to fall 1.6%. The S&P 500 index dropped 1.5% or 18 points and the tech-heavy Nasdaq lost 34 points or 1.3% today. The Financial Select Sector SPDR ETF was off 2.3%.

So what gives? Why is the same deal that sent the markets rallying on Friday causing it much pain today? Well on the most basic level the markets are responding as they have all year to news: sudden bursts of optimism followed by a drop in confidence as investors realize the real problems have yet to be addressed at all.

In this case European Union members set out to instill tougher budget rules to prevent a repeat of the ongoing debt crisis. This crisis has countries like Italy and Spain flirting with a default on their bonds. So all 27 EU members got together last week to figure out a way to avoid this from happening again. Everyone agreed to new rules which would include a cap of 0.5% of GDP on countries� annual structural deficits and penalties for any country whose public deficit topped 3% of its GDP�well, everyone except for the UK.

UK prime minister David Cameron is getting a lot of heat for his decision to veto the new treaty changes but when it comes down to it the real problem with the deal is that it doesn�t directly address the existing debt problem in Europe. Stronger fiscal policies are great but what good are they today in Italy, Greece and Spain?

A more direct approach would be to have the European Central Bank to step in, print money and buy up Eurozone bonds from a la Ben Bernanke�s quantitative easing. That doesn�t appear likely but some are speculating that the ECB�s moves to lower interest rates to 1% is a backdoor bailout for Eurozone countries.  Check out Tim Worstall�s piece on how the ECB is using European banks as intermediaries to buy Eurozone bonds.

Still, after a so-called make-or-break summit last week the markets are still left wondering how Europe will handle its immediate debt troubles.

Now what? Well, Moody�s said again it will review the ratings of all EU nations in the first quarter of 2012 �The absence of measures to stabilise the credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area under continued threat,� the agency said. The announcement from Moody�s today sent European markets down with Germany�s Dax closing the day down over 3%. Last week, Standard and Poor�s put 15 euro zone countries on a watch for potential downgrades.

The uninspiring news once again hit financial stocks here at home. Companies with exposure to European debt have the most at stake and their shares have become increasingly vulnerable to the ups and downs in Europe. Today Morgan Stanley shares dropped 6.% while Citi and Piper Jaffray both closed down over 5%. Bank of America was far behind with shares dropping 4.7% to close at $5.45.

In an interview with France�s Le Monde newspaper French President Nicolas Sarkozy addressed the possibility of his country losing its AAA rating.

And as if news in Europe couldn�t get worse, there�s a report in the BBC today from economists at  Standard Chartered bank that the Eurozone economy will contract by 1.5% in2012. They also said the UK economy will contract by 1.3% in 2012 compared to a previous prediction that it would grow 0.6%.

The UK is somewhat divided over prime minister David Cameron�s move to opt of out the EU agreement at the summit on Friday.Today Cameron stood by his decision before the House of Commons saying, he negotiated in �good faith� and that ultimately it was not in Britain�s national interest to sign up for the agreements coming out Brussels last week.

�I do not believe there is a binary choice for Britain that we can either sacrifice the national interest on issue after issue or lose our influence at the heart of Europe�s negotiating process. I am absolutely clear that it is possible to be a both a full, committed and influential member of the EU but to stay out of arrangements where they do not protect our interests,� he added.