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.