Will This Euro-Mess Ever End?

NEW YORK (TheStreet) -- I really wish I had had time to write about the EU summit last week. The risk-on rally on Friday was spectacular, yet obviously a short squeeze rather than a real bullish turnaround, as evidenced by the significant retraction in all aspects in the week after.

The EU summit agreement has four main points:

to create a bank supervision entity,

to allow the EFSF bailout fund (or the successor ESM) to recapitalize banks directly instead of the playing the stupid game of lending to sovereigns so that they can lend to banks so that they can lend to sovereigns. The eurozone banking union is far from certain due to Finland's very public objection and German's constitutionality challenge,

to give up the "super-senior" status of bailout funds; otherwise the bailout recipients would never be able to return to the market for funding, and

to use bailout funds to buy sovereign bonds directly on the open market so as to lower the borrowing costs.

All these steps are important and make sense; had they been taken earlier, we would not have been where we are today. Perhaps the most phenomenal aspect is the fact that even the German Chancellor Angela Merkel emerged as a winner in domestic politics, as the eurobond remains dead (instead of her), apparently thanks to some hardball negotiation tactics by France, Italy, and Spain.

Unfortunately, reality sunk in quickly again.

As reported by Die Spiegel, the very creation of the European Stability Mechanism, or ESM, will be subject to Germany's constitutional court review on Tuesday, after the parliament rectified the EU summit agreement Merkel brought back. FT Alphaville has started laughing at the "loss of super-senior status" bit before the ink was dry. Finland and the Netherlands have objected to one part of the agreement in a very public way.

And, as reported by the Wall Street Journal Friday, "a senior European Union official with direct knowledge of the situation" said that "euro-zone countries would still have to guarantee the loans the permanent bailout fund, the European Stability Mechanism, gives their banks even if it directly recapitalizes them."

Oops, you mean stretching a circular logic does not change its topology? And even then, the ESM "won't happen in the first half of 2013" anyway. OK, let's go home and get back on that euro short, then.

Cynicism aside, I think this time is a little bit different. At least it makes some sense this time, unlike the very recent Spanish bank bailout solution, for example. In other words, while there continues to be no reason for hope, at least we also continue to avoid despair. This is about the best thing one can possibly say about the eurozone affair.

Another reason for caution on the bearish front is, according to Bloomberg, there's still a big euro short position, contrary to the best FX strategists' predictions. Those shorts who could take the pain on June 29 did relatively well. But I don't expect them to continue holding those positions.

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