GLOBAL MARKETS-Little respite for euro from EU deal

LONDON (Dec 12): The euro slid and European stock markets dived on
Monday as investors judged that last week's pact to bind EU economies
closer together would fail to quell its financial crisis.

The sell-off brought the European Central Bank into the market early
to limit rises in Italian bond yields, which also had a knock-on effect
on Spanish debt, pushing up demand for safe-haven German bonds.

Crucially for markets, the summit failed to break the deadlock over
the more decisive involvement of the ECB that analysts say is needed to
end the crisis.

Investors are also worried that the plans agreed on Friday commit
much of Europe to years of crippling budget cuts that will hamper growth
and potentially derail the overall effort to put public finances back
on track.

"Yes, we have a plan in place to tackle the longer term problems
but...it doesn't tackle the shorter term problems," said Peter Dixon,
economist at Commerzbank.

The single currency hit a session low of $1.3261 after triggering
stops below Friday's trough of $1.3280, and was down around 0.8 percent
on the day. It is now about 6 percent below its October peak and 10
percent off its 2011 high of just under $1.50, struck in early May.

"There is a deflated feeling for the euro this morning after the EU
summit. People were looking for a greater response and more importantly
the ECB refused to significantly step up their bond buying," said Beat
Siegenthaler, currency strategist at UBS.

World stocks as measured by MSCI world equity index were down 0.26
percent on the day and are off over two percent for the past month. The
key European index, the FTSEurofirst 300 index, was down nearly 0.7
percent on the day.

However, euro zone bank-to-bank lending rates have fallen to the
lowest level since May as money markets continued to react to last
week's cut in ECB interest rates and its decision to start providing
banks with 3-year liquidity.

AUSTERITY FEARS

At the centre of analysts' criticism of the EU deal are doubts that
it will make its fiscal rules any more enforceable in practice than they
have been in the past.

In the short-term the biggest worry for many is that most of the
economies in trouble do not look capable of generating enough growth to
pay off their debts - and budget cutbacks will just make that calculus
worse.

"In and of itself these proposals aren't fiscal union at all. They
just really institutionalize the asymmetric adjustment that's been
occurring in the euro zone already with the peripheral countries making
all of the adjustment, (and) the core countries making none of it," said
Megan Greene, senior economist at Roubini Global Economics.

"And it just means that as the peripheral countries continue to
implement harsh austerity measures, it will undermine GDP growth. So we
won't see growth in the euro zone for a few years as long as this is the
case."

German bund futures were about 70 ticks higher at 136.35, after
opening lower. German 10-year yields were 7.7 basis points down at
2.025 percent.

However, 10-year Italian government bond yields jumped 32 basis points to 6.7 percent.

Moody's Investors Service said it would revisit the ratings of
European nations in the first quarter of 2012, after last week's summit
failed to produce decisive initiatives and left the euro area prone to
further shocks.

"The absence of measures to stabilise 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," it
said in a report.

The chief economist of fellow agency Standard and Poor's in Europe
said there would be need to be more summits and that time was running
out.

"Time is running out and action is needed on both sides of the
equation, on the fiscal and monetary side," Jean-Michel Six told a
business conference in Tel Aviv. - Reuters