Merkel and Sarkozy plan to have a plan

The euro and European stocks have risen modestly, but markets aren’t exactly full of enthusiasm about Angela Merkel and Nicolas Sarkozy’s announcement on the eurozone crisis yesterday. As usual, the German and French leaders were glaringly short on detail. Meanwhile, one of the few things they were clear about – doing “whatever is necessary for the recapitalisation of our banks” – is fuelling worries that any financial help for banks will further weaken the credit quality of EU governments’ debts.

Merkel and Sarkozy said they would present a “comprehensive” response to Greece’s and the EU’s problems as well as a bank recapitalization strategy by the end of the month. In other words, they plan to have a plan. This vagueness, particularly on the exact role the EFSF fund will play, only makes investors more jittery. “The lack of details suggests to us that there is for the time being no such thing as a comprehensive plan,” notes an RBS research email. Today, financial reporter Fabrizio Gorio has tweeted that an upcoming EU summit may be postponed.

The clock is ticking, as David Cameron graciously pointed out in an FT interview yesterday. He says European leaders have a matter of weeks to take a “big bazooka” approach to resolving the crisis. It’s the first time the Prime Minister has so openly expressed his frustration over the euro-chaos, and adds to the pressure already piled on by George Osborne, Barack Obama, Tim Geithner, Wen Jiabao and other world and economic leaders.

One of the main issues holding back Germany and France is worry about the fate of their own sovereign debt ratings, particularly on France’s part. Pumping money into sick eurozone banks – whether directly or via the ESFS – may undermine the credit positions of the richer EU nations, and there have already been whispers that France’s AAA rating is in jeopardy.

These worries are not completely unfounded. For instance, the lifeline that Belgium and France are throwing to the cash-strapped Dexia bank are today causing credit default swaps on Dexia to fall, while those on France and Belgium rise. Fears that Dexia will default on its debt are easing, just as fears that the French and Belgian governments will default creep slightly higher. S&P has just confirmed France’s AAA with stable outlook, but the bank debt vs sovereign debt seesaw is definitely something deeply concerning to both EU leaders and investors.