The deal reached last Friday among the 17 euro-area countries and six more European Union states to push through a stricter fiscal rule book won't be easy to implement from a legal perspective, European Council President Herman Van Rompuy said Tuesday.
The fact that the U.K. vetoed an EU-wide agreement means that the new rules take the form of an intergovernmental agreement outside the framework of EU institutions.
"An intergovernmental treaty was not my first preference, nor that of the most of the member states. However it will make the fiscal compact binding. It must be negotiated as a matter of urgency. It will not be easy, also legally speaking. I count on everybody to be constructive bearing in mind what is at stake," Mr. Van Rompuy said, speaking to members of the European Parliament to report the developments at last week's leaders' summit.
Mr. Van Rompuy appeared optimistic about participation in the new fiscal-rules framework despite the U.K.'s decision to block a unanimous agreement.
"It became clear in the course of the meeting that ... unanimity was not forthcoming. Faced with this fact, and I feel no need to be controversial myself on this ... there was no alternative than to go down the road of a separate treaty among the 17 euro-zone members, though open to others. Indeed almost all of the other members ... have now announced they will join in this process subject to consulting their parliaments," Mr. Van Rompuy said. "I'm optimistic because I know it is going to be very close to 27, in fact 26 leaders indicated their interest."
Countries' participation in the new fiscal pact should become clear soon. "As regards the calendar, rather rapidly, following consultations with national parliaments we should know the number of participating member states."
Investors and credit-ratings firms said they are worried that the steps taken by the EU last week fell short of what is needed to stabilize Europe's battered bond markets. Greece still teeters on the brink of default, and yields on debt of Italy and Spain are near unsustainable levels.
Many worry that prolonging the crisis raises the risk of a severe recession throughout the region, and could lead to the breakup of the euro zone.
The summit failed to revive investor confidence in the bonds of Europe's most indebted nations. Patrick Groenendijk, chief investment officer for the Transport Industry Pension Fund of the Netherlands, which has some €11.5 billion ($15.2 billion) under management, says the fund has sold its Greek and Spanish bonds, and has started selling Italy. "I don't see us coming back to that market any time, unless we have a breakup of the euro," Mr. Groenendijk said.
The yield on Italian 10-year debt rose to 6.44% on Monday, from 6.27% Friday. While that is down from euro-zone era record highs of over 7% in late November, it reflects a deterioration from last Tuesday, when Italian 10-year debt yielded 5.75%.
"We got some significant decisions from the authorities in Europe, but not what really mattered to the markets," said Daniel Katzive, currency strategist at Credit Suisse. "There were no indications there is going to be some effort to bring peripheral bond yields down to more sustainable levels."
In the U.S., the mood of investors also was affected by a profit warning from chip-making giant Intel Corp., which said recent flooding in Thailand disrupted the supply of personal computers and reduced demand for its chips. Dour economic news from China, in part due to falling demand from Europe for consumer goods, also weighed on sentiment.
At the EU summit on Friday, leaders hashed out an agreement that would see the 17 euro-zone governments and potentially others in the 27-nation EU accept greater fiscal unity, including penalties for violating budgetary restrictions.
By Monday, signs were emerging that implementing the accord wasn't going to be easy.
The EU agreement to advance up to €200 billion to the International Monetary Fund to bolster its resources became the subject of dispute in Germany. Andreas Dombret, a member of the board of the Bundesbank, the German central bank that would put up the funds, said the German parliament should have the right to approve or reject Germany's share of the IMF loan, which he put at around €45 billion—over one-quarter of Germany's entire official reserves.
In Ireland, the government plans to decide whether a referendum will be needed to accept the pact. Europe Minister Lucinda Creighton on Friday put the chances of that at "50-50." An Irish "no" wouldn't necessarily derail the pact, but it would place Ireland in limbo—inside the euro zone but outside its proposed fiscal pact.
The agreement likely will need to get parliamentary approval in Sweden, Hungary, the Czech Republic and possibly Denmark.
"The more you hear from the European leaders, and the less you see implemented, the more skeptical you are," said J.P. Morgan Asset Management chief market strategist Rebecca Patterson.
Ratings firms contributed to the skeptical tone, with strongly worded critiques of the summit and the pace of reforms.
"It is clear that politicians are responding to the euro-zone sovereign debt crisis through incremental improvements," Fitch Ratings said. "Taking the gradualist approach imposes additional economic and financial costs compared with an immediate comprehensive solution. It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond." In the meantime, Fitch said, it expected a "significant economic downturn across the region.
Moody's Investors Service also chimed in, saying "the absence of measures to stabilize 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."
Moody's repeated its plans to review European sovereign ratings in early 2012. Standard & Poor's has placed ratings across Europe under review for downgrade, and market participants expect that in the wake of the summit, S&P will make good on its threat to downgrade many countries, including removing France's triple-A rating.
In France, President Nicolas Sarkozy appeared to prepare the ground for a downgrade in an interview with the newspaper Le Monde. "For the moment they have maintained the triple-A," he said. "If they take it away from us, we would confront the situation with cool heads and calm. It would be difficult, but not insurmountable."
With the summit having fallen short of expectations, many fund managers are sitting on the sidelines. It appears that the aggressive selling that took bond prices sharply lower starting in late summer has faded, but without confidence in official steps to combat the crisis, buyers remain scarce. In addition, with just a few weeks left in 2011, few investors are inclined to make big moves before closing the books for the year.
Many investors are still looking for the European Central Bank to step in to make large-scale purchases of bonds of peripheral European nations, particularly Italy and Spain. That, in turn, would help prop up bond prices more broadly. So far, the ECB has resisted, choosing instead to make smaller purchases.
Investor disappointment was highlighted Monday by the selloff in debt issued by Italy and Spain, despite the ECB stepping in to buy some of the bonds.
"When Italian debt yields are between 6.50% and 7.50%, there's still a lot of trouble out there," said Jay Wong, principal and equity portfolio manager at Payden & Rygel in Los Angeles. "That's how you know the market doesn't see a true resolution."
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