Another euro zone week to reckon with

September 10, 2012

Despite Mario Draghi’s game changer, or potential game changer, the coming week’s events still have the power to shape the path of the euro zone debt crisis in a quite decisive way, regardless of the European Central Bank’s offer to buy as many government bonds as needed to buy politicians time to do their work.

The nuclear event would be the German constitutional court ruling on Wednesday that the bloc’s new ESM rescue fund should not come into being, which would leave the ECB’s plans in tatters since its intervention requires a country to seek help from the rescue funds first and the ESM’s predecessor, the EFSF, looks distinctly threadbare. That is unlikely to happen given the court’s previous history but it could well add conditions demanding greater German parliamentary scrutiny and even a future referendum on deeper European integration. For the time being though, the markets are likely to take a binary view. ‘Yes’ to the ESM good, ‘No’ very bad.

Dutch elections on the same day look to have been robbed of some of their potential drama with the firebrand hard-left socialists now slipping in the polls and the fiscally conservative Liberals neck-and-neck with the likeminded centre-left Labour party. But there are no guarantees and Germany could yet be robbed of one of its staunchest allies in the debt crisis debate.

There’s much more…
At the end of the week European Union finance ministers gather in Cyprus with a separate meeting of the euro zoners who really count set for the Friday. Spanish officials had suggested that this could be the venue to discuss the details of a sovereign bailout which would offer bond-buying help but the signs now are that Prime Minister Rajoy is dragging his feet in an effort to have as few of the strings that the ECB says is necessary attached as possible. The fall in Spanish borrowing costs thanks to Draghi’s intervention also takes a little of the heat off.

But time is pressing. Spain faces a refinancing crunch in late October so unless Mario Draghi’s verbal intervention is enough to suppress Spanish yields – which may work for a while but probably not for long – it may be tipped into seeking help.

French President Francois Hollande, nervous that his country could get dragged into the mire, wants a solution for Spain and Greece to be nailed at a mid-October EU leaders’ summit. On Greece, the troika of EU/IMF/ECB inspectors will continue their assessment and will struggle to find a chink of light.Over the weekend, Hollande pledged deep cuts next year, meaningful labour reform and lowered his growth forecast — not a pretty mix for a struggling economy.

The fourth plank of yet another pivotal week is the European Commission’s unveiling of its blueprint for a banking union. Once cross-border supervision is established, EU leaders have decided the ESM can refinance banks directly – giving them another string to their crisis-fighting bow – but Brussels is already at odds with Germany. Berlin wants only the 30 or so very biggest European banks to be put under ECB supervision, the Commission wants all banks to be under its umbrella, or at least the roughly 200 which account for 95 percent of euro zone banking assets. Further wrangling leading to delay would send a bad signal just as Draghi has cheered markets up. And it should be noted that the most profound parts of a banking union, particularly a joint deposit guarantee scheme to prevent bank runs, are not even on the table yet and are likely to take years to introduce.

In Greece, ministers met the troika of EU/IMF/ECB inspectors who questioned some of the measures outlined in nearly 12 billion euros of cuts which Athens must deliver in return for its next bailout loan tranche. No decisions likely for a few weeks yet but as we’ve said, it’s pretty inconceivable that Greece won’t get more time and/or money this time around as to let it go would wreck any attempts to shore up Italy and Spain. It’s also worth noting that Prime Mininster Antonis Samaras has not yet got his coalition partners to sign up to the latest cuts

There’s plenty more shuttle diplomacy to get our teeth into with Rajoy’s meeting with his hardline Finnish counterpart a potential highlight along with Bundesbank chief Jens Weidmann, the sole internal opponent of the ECB bond-buying plan, breaking cover to make a speech. The Swiss National Bank holds its quarterly policy meeting but with the euro climbing versus the safe haven Swiss franc after Draghi’s thunderbolt, some of the pressure to take fresh action may have been removed. The cap imposed on the franc by the SNB has held intact, pretty much, for a year now.
Finally, an Italian bond auction on Thursday should presumably go well for the same reason.

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