Financial markets reacted with cautious optimism following the decisions taken last week, but the cracks have started to show in the days since.
After some of the previous ‘make-or-break' EU and eurozone summits, when leaders foolishly claimed to have solved the crisis, markets managed to contradict them within days, sometimes even within hours.
This time it is different. By the weekend, markets were still generally positive about the outcome. Analysts have been calling for months for extra powers to be given to governments to reduce their borrowing costs and for the ‘vicious circle' between public finances and bank capital to be broken. When leaders seemingly obliged, the markets liked what they saw.
Before the summit, Spain's borrowing costs had risen above 7% – the sort of levels that Portugal and Ireland were recording when they were forced into full bail-outs – but by Friday they had fallen to 6.4%. Italy's ten-year bond yields fell immediately after the summit too.
However, as the days have passed, markets have become less confident that the summit provided the dramatic short-term measures that they had been urging.
“It was certainly a positive reaction at first but over the first two days of this week we have seen that the markets don't believe the outcome [of the summit] was as clear cut as they thought at first,” said Carsten Brzeski, senior economist at ING.
“There is still enormous conditionality attached. Markets realise that the Italians and Spanish only have one foot in the door.”
Markets were less buoyant on Monday (2 July) after suggestions that the Netherlands and Finland may oppose countries' bond-buying requests.
The first real test of market sentiment is likely to come today (5 July), when Spain attempts to sell up to €3 billion of three, four and ten-year bonds.
Also today, the European Central Bank will announce whether it is cutting interest rates. Markets are likely to react badly if the governing council does not agree to a cut of 0.25%.
“How long the calm will continue, no one knows,” said Brzeski. “Market consolidation is continuing for now but it is very fragile.”