Monday, 12 December 2011

A eurozone deal – now markets await the detail.

Mike Lenhoff's market tactics - 12 December 2011

Perhaps the detail of it was never a likely prospect at last Friday’s EU summit. However, to give the eurozone’s fiscal compact credibility, not only with the markets but also with the ECB, the process of adjustment and timeline towards the rules on fiscal governance need to be spelled out. Where ratios of budget deficits and debt to GDP exceed those stipulated, what is the adjustment process that applies before automatic sanctions kick in?

Part of this is implicit in the terms and conditions agreed already in the bailouts for Greece, Ireland and Portugal but not for such members of the eurozone as France, Spain and Italy which are expected to end this year with budget deficit to GDP ratios in excess of 3 percent. Until a comprehensive process of adjustment is specified, the risk is that markets take the view that the fiscal compact is incomplete and lacking in credibility. The risk is also that the ECB sees it that way too and remains hard-nosed about what it is ready or not to do.

Hopefully this will form part of the detail to be put in place by March 2012. According to the European Commission President, Mr Barossa, the EC will be ‘acting to ensure swift preparation of the treaty that is fully compatible with European Union law and which also preserves the role of the European Institutions’.

What has been agreed is that the original Stability and Growth Pact (S&GP) is to become a binding fiscal framework with sanctions on any breach of the rules governing the Pact. The framework will be grounded in an intergovernmental treaty (that will sit along side the EU Treaty that Mr Cameron refused to sign up to). The European Stability Mechanism (ESM) is to become operational at the beginning of July next year but the European Financial Stability Facility (EFSF) is still expected to run to mid-2013. The two combined are to be limited to 500 billion euros, although this may be subject to revision. More >

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