Euro zone finance ministers signaled on Monday they would flesh out a deal to bolster their bailout fund over the next week, while Fitch Ratings warned the steps were not enough to resolve Europe's debt crisis.
Financial markets reacted positively to the surprise outline early on Saturday of a comprehensive package of measures to get on top of the crisis, expanding the role of the temporary EFSF bailout fund and easing the terms of aid for Greece.
But there remained doubts over whether the terms of the deal go far enough.
Fitch said that while a move to allow the temporary mechanism (EFSF) and future permanent fund (ESM) to buy bonds was helpful, it would not resolve the concerns that have driven a year-long market selloff of government debt.
"The potential for the EFSF and ESM to buy government debt in the primary market all materially enhance the European policy response to the current crisis," the agency said.
"However, the policy response to the current crisis outlined by euro area leaders will not resolve market concerns over the 'solvency' of some highly indebted euro area member states."
The measures that euro zone leaders agreed on still need formal approval at the next EU summit on March 24-25, with risks including the political reaction to the deal in Germany.
Eurogroup chairman Jean-Claude Juncker said ministers would meet again next week to try and thrash out further details.
"We are discussing ways and means how to return to the initial level of 440 (billion euros). Will this be done by guarantees or could there be other means? My present feeling is that this will be done by guarantees.
"We have to discuss further details next week."
Initial signs were positive from financial markets, with the premium investors charge Spain, Portugal and other countries in the firing line in the crisis falling.
Spanish, Italian and Portuguese yield spreads over Bunds were as much as 15-25 basis points tighter on the day while the cost of protecting struggling governments against default dipped, led by a full point fall in five-year Greek credit default swaps.
"In our view (the leaders') agreement, relative to the dampened expectations of the last few weeks, provides good momentum for a solution to EMU's structural issues," said Gilles Moec, economist at Deutsche Bank.
"However, a lot still needs to be fleshed out within the next two weeks, and the absence of a deal on Ireland is a disappointment," he said.
While euro zone leaders cut the interest rate on their bilateral loans to Greece by 100 basis points and more than doubled their maturity to 7.5 years, Ireland did not get a cut in borrowing costs because it did not want to discuss harmonizing the corporate tax base.
WAYS AND MEANS
The leaders agreed in their midnight talks on Friday that the effective lending capacity of the euro zone rescue fund, the European Financial Stability Facility (EFSF), should be raised from the current 250 billion euros to the nominal value of 440 billion euros.
The effective capacity of the EFSF is currently lower than the nominal value because not all euro zone countries issuing guarantees have the triple A rating that the fund wants.
The ministers are now discussing how to achieve the higher lending capacity — either via raised guarantees for EFSF borrowing by all euro zone members, or by a mix of higher guarantees and capital injections into the fund.
The guarantees, on a pro rata basis, now stand at 120 percent of a country's share in the capital of the European Central Bank.
The ministers will also have to decide how to implement other changes to the fund agreed by the leaders — allowing the EFSF to buy bonds of distressed sovereigns at primary bond auctions and lowering the interest rate charged for the loans.
"Perhaps the most important development is the willingness to lower the interest rates on the EFSF loans," Nick Kounis, economist at ABN Amro, wrote in a research note.
"The interest rate, together with the primary budget balance and economic growth, is crucial to the government debt outlook and hence the solvency of particular governments," he said.
Euro zone leaders agreed that the new EFSF interest rate "should be lowered to better take into account debt sustainability of the recipient countries, while remaining above the funding costs of the facility, with an adequate mark-up for risk, and in line with the IMF pricing principles."
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