Sovereign risk issues remain for a number of the more highly indebted eurozone countries despite the substantial war chest apparently thrown at European Monetary Union countries. In addition, contagion risk has not gone away and many issues and unanswered questions remain.

The $1 trillion (Dh3.67trn) rescue package, euphemistically called the stabilisation fund, recently announced by the EU is a huge amount, and in fact more than the US threw at its troubled banking sector and economy during the sub-prime crisis and its aftermath, but doubt remains if it will be successful in terms of firstly halting the ever-increasing contagion risk and secondly if it will, in the end, rein in debt levels and public deficits. Ultimately the strength of the euro will be correlated to the success of the rescue package and framework, but the euro is not out of the woods yet. The market initially met the announcement of the substantial fund with euphoria, but this has since dissipated as a certain amount of reality has been acknowledged.

The EU has now made noises about toughening up the oversight and monitoring of member countries' budgets and spending. This is all well and good, but in practice it will be extremely difficult to implement. Indeed, strict criteria for such things as budget deficits have been in force since the introduction of the monetary union, but many member countries have gone way over apparent limits, in some cases by more than threefold.

Recent economic growth statistics for EU member countries have been slightly better than anticipated in some cases, for example Spain recorded growth of 0.1 per cent in first quarter of 2010. However, great disparity remains. Germany continues to be the powerhouse economy, both by size and performance, and partly because of this it is fully understandable why there is great resentment in Germany for its significant contribution to fellow member countries who have allowed their economies to spiral out of control for many years.

Bond prices for European sovereigns have increased since the stabilisation fund was announced, but for many members the yields remain extremely high. This is an important issue, particularly for European institutions such as the big French banks that have large holdings of Greek, Spanish and Portuguese paper. Although most of these securities are classified within their held-to-maturity portfolio, and thus the volatile pricing and valuation is not an impact as such, it will have an effect through collateral arrangements. Moreover, banks that have these securities classified as available for sale or trading would be hit immediately through valuation erosion. In turn, this has a negative impact on capital positions.

To date there is very little detail on the precise structure and mechanism of the stabilisation fund. How will it work and how will the money be created? Early thoughts are that the larger part of the stabilisation fund will be provided by a newly created Special Purpose Vehicle backed by pro rata national government guarantees of the member states. The vehicle will have a maturity of three years and can have a volume of up to $550 billion. The IMF will provide additional funding of at least half the European contribution. The lack of detail will likely again put pressure on the euro and sovereign risk of the more vulnerable eurozone countries will remain. The longer it takes to provide details the more the market will become negative.

The European Community plans to raise funds by issuing bonds that are backed by EU member states, which will then lend money on to the countries in need. Lending would be conditional on the country delivering on a number of policy areas, notably budget cuts. One of the intended key differences would be that the fund would be readily available without having to go through the same lengthy approval mechanism again for another country. This is good in theory, but whether it would work in practice in the bureaucratic decision-making structure of the EU is debateable.

In reality, the proposed stabilisation fund simply buys time for those EU countries under budgetary and debt pressure. It is not a cure all remedy and the heavily indebted countries still have to make and enact tough measures in order to improve their finances. As has been seen, this is not easy. If the issue is not quickly addressed, then contagion risk is created. The EU speaks of strengthening its own governance and surveillance of member states, particularly in areas of debt levels. Up to now it has largely failed on this count and the question remains to what extent it can control member states finances going forward.

The market was initially surprised by the announced size of the stabilisation fund as it is impressive in numbers. But the success will depend on far more than purely the size of the fund. Some believe that the current European sovereign debt crisis could act as a catalyst for an ever closer fiscal union of European countries. However, there will be fervent voices from many sections of the stronger member states that the opposite should occur.

The European sovereign risk issue may have dissipated for now, but issues remain and the forces of the market are likely to again raise doubts on the stabilisation fund. The highly indebted countries will remain under pressure and, in turn, so will the euro.

- The writer is US-based commentator on business issues