Get me to the court on time

July 11, 2012

Markets were a little unnerved yesterday by concern that Germany’s top court may take a long time to rule on complaints lodged against the euro zone’s permanent bailout fund, the ESM, which was supposed to come into effect this week. Finance Minister Schaeuble urged the constitutional court to reach a speedy decision. The judges are not expected to block it but Germany’s president says he won’t sign it into law without the court’s go-ahead. A minor delay will pose no problem. A lengthier one could jolt investors.

The head of the court raised the possibility of a review taking take two to three months. That could create a dangerous vacuum though he stressed that was just one option. Schaeuble is just out again saying he hopes for a verdict before the autumn.

Bundesbank head Weidmann said even rapid ratification may not stop the crisis escalating further. With only a maximum 500 billion euros (100 billion of which is earmarked for Spain’s banks) at its disposal, the ESM looks ill-equipped to tackle the bond market head on. When the European Central Bank intervened last year to lower Italian borrowing costs it was spending 13/14 billion euros a week. And even then, it bought only temporary leeway.

Prime Minister Mario Monti said yesterday that Italy could be interested in tapping the euro zone’s rescue fund for bond support. Finnish premier Katainen says the euro zone is in its most parlous situation since May 2010 when Greece was near  collapse for the first time. So whether the ESM rapidly comes into being or not, if the crisis worsens, all roads lead to the reluctant ECB once again.

Madrid is due to spell out the extra debt-cutting measures it has come up with in return for the euro zone giving it an extra year to get its budget deficit below three percent of GDP.
The Spanish government has produced a package of up to 30 billion euros over several years through spending cuts and tax hikes.  A source close to the Spanish government said 10 billion euros of cuts would come this year and that the measures would include a hike in VAT sales tax, reduced social security payments, reduced unemployment benefits and changes to pensions calculations.

Euro zone finance ministers agreed on Monday to hand over a first tranche of 30 billion euros to bail out Spain’s banks. The final total – up to 100 billion has been set aside – will be decided on July 20. As part of the deal, 14 banking groups making up 90 percent of the sector will face new stress tests. More controversially, given the Greek experience, private holders of hybrid and subordinated debt will have to take a haircut. In Spain’s case, this will largely hit retail investors and maybe hundreds of thousands of them.

The burning question is, given Spain is already in recession, whether the latest debt-cutting measures will merely push it deeper into the mire, shrinking tax receipts further and making debt reduction even harder.
An EU document offering the looser deficit targets said even they will prove difficult to reach. It also demanded Madrid by subject to three-monthly checks, a level of scrutiny Prime Minister Mariano Rajoy has been desperate to avoid. Rajoy will unveil the latest cuts in parliament from 0700.

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