The five big holes in Europe's rescue plan

Eurozone policymakers last week hammered out a solution to the sovereign debt crisis plaguing the region, but fund managers have highlighted five unknowns that may continue to worry the market.

1. WHERE NEXT FOR ITALY?

“All eyes are on the credit markets to see if sovereign solvency concerns for the likes of Italy abate.” – Paul Wild, JOHCM

“I do not know when the markets will focus on Italy again – it could be tomorrow or in a few weeks, however, I remain cautious.” – Charlie Deptford, Smith & Williamson

“Repeated promises by Berlusconi on structural reforms will have to be seen to be believed between now and next summer.” – Jeff Taylor, Invesco Perpetual

2. IS DEFAULT STILL A RISK?

“The eurozone is in an impossible situation.  The sovereign debt is uneconomical to repay but politically impossible to forgive. Default is unavoidable and not limited to Greece.” – Jan Luthman, Walker Crips

3. WILL EUROPE NEED ANOTHER RESCUE PLAN?

“We do not think the announcements last week will be the final number for anything, with possible exception of the tier one capital figure. The forecast for Greece gets you to 120% debt to GDP – that is a forecast for seven to eight years’ time, and clearly that is subject to growth.” – Peter Harvey, Cazenove

“This has provided the framework for a solution but the real work starts here. Given where expectations were a month ago, this is incrementally positive, but I doubt it will be the last plan we will see as the problems will take a long time to sort out.” – Barry Norris, Argonaut

4. WHERE WILL GROWTH COME FROM?

“Trend rates of economic growth far too low in some countries, notably Italy, to justify the large debt burdens which have been created. Europe needs a substantial growth package for 2012, supply side reforms backed up by supportive fiscal and monetary policies, which can help to generate the economic growth needed to bring debt-to-GDP ratios back on a sustainable path.” – Andrew Milligan, SLI

“On the positive side, we have seen more political willingness but I am concerned about the lack of growth. This will lead to big deficit issues for all countries – the debt is not going to go away.” – Charlie Deptford, S&W

5. WHAT WILL THE IMPACT BE ON INFLATION?

“Throwing ever more money at the problem may, in the long run, stoke inflation, but in the short run it helps halt the slide in confidence caused by the authorities’ inaction. For this reason we will retain our exposure to index-linked bonds and gold to cover the risk that inflation takes hold in the Western nations.” – David Jane, Darwin IM

“Demand from consumers in Europe will remain constrained. As a result inflation is likely to be subdued, which means interest rates in China, India and other EMs may come d own and that is very good news for companies selling into those markets.  In that context we have today been buying global businesses selling to consumers in the Far East.” – Giles Hargreave, Marlborough

BUT ON THE BRIGHT SIDE...

DISASTER HAS BEEN AVERTED

“It is a step in the right direction. We can pick off individual concerns and negatives but generally the powers are moving in the right direction – policy is moving towards a safer place and it feels as though leaders have grasped the depth of the crisis.” – Peter Harvey, Cazenove