Friday, 29 June 2012

Progress or more plasters? A Eurozone Summit with a positive surprise!

No more kicking the can down the road! The triumvirate of Mr Monti, Hollande and Rajoy is seeing to that. There may be a lot more hurdles and obstacles in their path towards putting in place the vision of financial and fiscal integration framework outlined by Mr Van Rompuy earlier this week in his co-authored report Towards a Genuine Economic and Monetary Union. Europe’s leaders have now agreed to tackle the more immediate issues as well as the long term strategy for a strengthened and more credible monetary union. The following are among the action points agreed in principle (a further session is planned for 9 July to take these forward):
  • A single supervisory body for eurozone banks is to be established by year-end 2012. 
  • Direct recapitalisation of troubled banks through the eurozone rescue funds (the European Financial Stability Facility and the European Stability Mechanism but more likely the latter).
  • Abandonment of their preferred creditor status. 
  • Support via the rescue funds to help stabilize distressed bond markets, not necessarily via second market purchases but via the primary markets, and without further obligation from the point of view of fiscal austerity for those countries complying with their budget rules and reforms. 
  • A growth pact amounting to 120 billion euros. 
There are genuinely positive surprises here. For example, Mrs Merkel did not exactly warm last week to Mr Monti’s idea of using the European Financial Stability Facility and/or its successor, the European Stability Mechanism to buy distressed sovereign debt in secondary markets, specifically that of countries complying with their reform objectives. Although this proposal received support from Mr Hollande, who believed it merited discussion, it was not clear what would come of it and indeed, it had the appearance of being a non-starter at the summit. While there are still issues, such as the limitation of this support owing to the size and capacity of the ESM and also with the participation in primary rather than secondary markets, which was what Mr. Monti originally proposed, there is progress just the same.  

Overall, this is a more promising outcome than had been expected at the start of the week when Angela (don’t see total debt liability as long as I live) Merkel gave a thumbs down for the kind of relief measures that now appear to be points for more immediate action.  

While it would be expecting too much at this stage for what has been agreed in principle so far to lift that ‘black cloud of uncertainty’, to which the Governor of the Bank of England, Mervyn King, has referred. The outcome does demonstrate a new found momentum to dealing with the sovereignty crisis and as such should be unambiguously welcome news for the markets. Germany’s parliament is due to approve the ESM and also the ‘fiscal compact’ tonight. Let’s hope there are no glitches here.

Mike Lenhoff
Chief Strategist

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