Markets in Risk ON mode on Easing of EU’s Debt Crisis Rules

It seems that global financial markets are in a RISK ON mode anew as EU officials come into an accord to ease debt rules.

From Bloomberg,

Euro-area leaders agreed to ease repayment rules for emergency loans to Spanish banks and relax conditions on possible help for Italy as an outflanked German Chancellor Angela Merkel gave in on expanded steps to stem the debt crisis.

After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels today, leaders of the 17 euro countries dropped the requirement that governments get preferred creditor status on crisis loans to Spain’s blighted banks and opened the door to recapitalizing banks directly with bailout funds once Europe sets up a single banking supervisor.

The leaders struggled for consensus on reducing market pressure on Italy and Spain, where surging borrowing costs stoked concern among investors and global policy makers that the currency union threatened to splinter and risk damaging the global economy. They would be allowed access to rescue loans without relinquishing control of their economies.

“We agreed on short-term measures that should apply to Spain and Italy,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro finance ministers. “We will keep all options open to do the interventions that need to be done to calm the situation. There is a whole array of possible interventions and measures.”

Make-or-Break

The gathering marked at least the fourth time in the past year that the guardians of the euro faced a make-or-break summit to restore confidence in their 17-nation bloc. They have struggled so far in vain to contain the financial crisis that began in Greece in 2009. The turmoil claimed its fifth victim this week when Cyprus sought a bailout.

Rules are made to be broken in order to accommodate the interests of the political elites, so what else is new?

We have seen this story play out again and again.

1. Realization that the crisis hasn’t been resolved sends the market into a RISK OFF mode.

2. EU officials meet and make announcements (pledges to inflate, new accord, new rules, new lending and etc…) and the markets switches to a RISK ON mode.

3. Go back to stage 1.

The problem is that the positive impact from such political actions seems to be diminishing.

The article says that EU “have struggled so far in vain to contain the financial crisis that began in Greece in 2009”.

Well that’s because EU officials have been using politics (such as the above) as the main tool to solve economic problems in order to preserve the status quo, mostly through financial repression measures.

Instead, EU officials should adjust politics to conform with economic realities through economic liberalization reforms.

Denials and measures that bank on hope or short term patches won’t have any lasting impact. This only worsens the uncertainty and sets the conditions for magnified volatility.