In any negotiation, people have to believe that you mean what you say. The enduring problem in the on-going “negotiation” between the Eurozone governments and the financial markets is that the markets do not believe that the Eurozone governments have the will or the capacity to address the sovereign debt crisis.

Prevarication and avoidance have marked the response of the Eurozone Governments so far which simply deepens market scepticism. The Markets now assume there will be a sovereign debt default in Greece and so attention has switched to the stability of the Banks which would suffer in any such default.

Unfortunately in this context it is almost irrelevant that President Sarkozy and Angela Merkel stand shoulder to shoulder and say that “everything necessary” will be done to recapitalise Banks in the Eurozone. This also does not provide any credibility that the issue will actually be addressed – in legal terms it has all the persuasiveness of “an agreement to agree”.

If one side in a negotiation feels the other side lacks credibility then they are likely to push harder for what they want. So it is that in these circumstances it’s no surprise that after initial mutterings of support, the markets decided that the message from Merkel and Sarkozy meant virtually nothing. Indeed Moody’s warned that “since any recapitalisation initiative will not address the underlying driver of Europe’s Bank crisis (mounting sovereign debt concerns) it is unlikely to achieve more than a temporary respite from Banks sovereign debt woes and we expect investor sentiment to remain fragile”….

This is a crisis arising out of poor negotiating technique as much as underlying economics. Until the Eurozone musters the negotiating skill to negotiate with the markets effectively, and provides certainty when it “bids”, then it will never be able to “close the deal” and put the Eurozone crisis to bed.