Merkel Concedes to Other Eurozone Leaders
By Walter Kurtz, Sober Look
With Hollande supporting Italy and Spain, Germany has became isolated. “Merkozy” is no more. Worn down Merkel conceded, sending risk assets to a massive rally. Caught in a short squeeze, the euro rallied nearly 2 % this morning. But with all the hoopla, let’s take a step back and see what exactly did Germany agree to in the middle of the night. Here are some highlights.
1. Spanish banks will be bailed out (€100bn) directly out of ESM/EFSF rather than going through the Spanish government. This will avoid increasing Spanish government debt.Amazingly only last week Merkel said she could never agree to direct lending to these banks because she would be unlikely to “get her money back”.
2. The Spanish bank bailout will not subordinate the bond holders as was expected.
3. Perhaps the most important agreement was that the European Stability Mechanism (ESM) could buy government bonds to reduce periphery borrowing costs. The only official statement was that the ESM will be used to buy bonds in “in a flexible and efficient manner”. No further details for conditions on such purchases were provided. This is clearly a victory for Mario Monti, who’s been pushing hard for this measure.
EURO AREA SUMMIT STATEMENT: – … We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States …
4. There is an agreement to set up a single banking supervisor in 2013.
That seems to be it. A few observations:
- As expected, there is no agreement on a “banking union” that would provide deposit insurance across the euro area.
- The ESM, having already committed €100bn to Spain’s bank now only has €400bn of capital. Given the amount of debt the periphery nations will need to roll in the next couple of years, this is hardly credible. And the Eurozone leaders have not agreed on the details of how capital will be released. We all know how easily the leadership gets caught up bickering over the details.
- There will be pressure on the ECB to do what the ESM may be unable to do – expand the SMP program to buy more periphery bonds (so much for central bank independence). It already bought €220bn, but Monti and company will expect far more. That basically means QE.
Overal the market reaction may be premature. There is nothing final about these agreements and they do not get at the heart of the problems of run on banks and investors’ ability to absorb more sovereign debt – particularly at the risk of subordination by ESM. There may also be significant backlash from German politicians and the public.
9 Comments
You said: “There will be pressure on the ECB to do what the ESM may be unable to do – expand the SMP program to buy more periphery bonds (so much for central bank independence). It already bought €220bn, but Monti and company will expect far more. That basically means QE. ”
I think very many investors have jumped to conclusions that today’s summit agreement, as surprising as it was, means that Merkel and the Germans will also cave in and allow the ECB to go ahead with its own QE program. If that turns out to be true, it will be bullish at least for a few months, maybe more.
Thanks for a nice, clear, well-written statement of the facts.
So is a 1/3 of the funding for the esm coming from the likes of spain and italy? Ponzi scheme.
If this deal kicks the can past November 6, Obama is the big winner. There is no black swans over the horizon before the election.
With the news coming from European Union, I´m becoming more and more convinced that the situation with their common currency is unsustainable in a long term.
As a Canadian, I´m curious about the impact of the European bailout on our real estate. With enormous levels of debt, upcoming Obamacare and depressed European markets, the situation looks more than desperate. Bailouts won´t resolve anything in my opinion, so as Obamacare or non-intervention into mortgage markets.
I hope that all the doom and gloom will be resolved, in each part of the world by their own political representation, and that we will experience another period of (at least moderate) growth of median salaries.
what in the world does Obamacare have to do with Canada, or Canadian real estate?
As for Canadian real estate, I’d focus not on external factors, but on internal ones. What is the debt to income ratio in your area? If it takes increasing leverage to buy a home, over and above increasing incomes, you’re going to burst. Vancouver and Toronto have been in the denial stage of a bubble for quite some time. The thing about bubbles is they keep going well after they are recognized, which provides “proof” that they aren’t bubbles at all. People kick themseleves for not buying because of how much money they would have made if only they had bought in the past, and those that did buy in the past congratulate themselves on their savvy and take on even more debt. But at some point the debt levels aren’t sustainable…. there isn’t a greater fool…. and/or an economic shock hits (which is maybe why you’re worried about Europe – again, no idea what Obamacare has to do with you) and a tiny iddy bit hit to a few jobs and income and the pile of debt comes crashing down.
Obviously, the market reaction seem to indicate that all of us that are pessimistic about the EuroZone are a bunch of dummies.
There was a time when the market had a 3 months horizon. Now it’s no more than 3 weeks, but may be it’s shorter. I played a contrarian calls last week (on italian bonds) because of the extreme oversold conditions and the euro meeting coming (they had to show something). Cash some little money soon and wait for the next one. I’m not worried to have to much cash, there is no inflation coming soon, but i’m worried to loose my money because of frantic movements on the market.
@Octavio, you and I and all the many Euro-skeptics may seem like we are dummies after last Friday’s big short-covering rally. EZ leaders have succeeded in kicking the can for a few weeks or maybe even a couple of months. But is there enough money in the ESM and ESFS? As Quark stated, about one third of the funding is coming from Spain & Italy? So they are putting up money to bail themselves out? Not enough details came out of this latest EU summit. A plan to come up with a plan. Can they, will they, follow through and deliver a true solution?
The article today by David Marsh on MarketWatch is worth reading. David is a very well informed ex-FT European editor who is a specialist on Germany with connections at the most senior level of German politics.
The major German concessions (above all, over the use of ESM European rescue funds directly for Spanish banking recapitalization) agreed at the euro summit are unlikely to enter into force. The compromises announced on Friday between creditors and debtors will fall apart because they are mutually contradictory.
http://www.marketwatch.com/story/euro-compromises-likely-to-unravel-2012-07-02