 A deal and an initially positive market reaction
This is a shorter briefing as usual – as there is no point in reporting pre-summit press coverage after leaders reach agreement. It came at around 4am CET this morning after a long night of tense negotiations, during which Italy and Spain blocked agreement on a growth pact- a PR exercise of no macroeconomic relevance but important to Merkel because it was part of her agreement with the opposition to win their support for the ratification of the fiscal pact. Monti and Rajoy made their assent to the growth pact dependend on a simultaneous deal on measures to reduce the spreads of Italy and Spain.
So what is the agreement?
We put as there bare minimum requirement for a short-term stabilisation of the eurozone the following three conditions: 1. a simpler ESM bond purchasing mechanism. 2. for the ESM to inject capital into banks. 3. a banking licence for the ESM.
Of the three, EU leader agreed the first, made a conditional agreement on the second, but did not agree the third. The euro increased initially, and was $1.2567, about half a cent higher than yesterday morning. The best metric on bond is the future markets. As Reuters reported this morning, September bund futures were lower, with yields up 12.5bp, while Italian BTP future rose sharply, with an implied fall in bond yields. This would imply a notable fall in spreads (which is not yet recorded in our table below.)
The German media were still mourning the football result – several of the main news organisations had even recorded the result by 7am. Many of the news reports we saw this morning left as many questions open as they answered. In particular, it is not clear how exactly the ESM can “recapitalise” a bank directly. Will it take equity stakes, preferred equity, and can it do this under the existing ESM treaty? It was our reading of this treaty, that such flexibility is not foreseen. And the lack of such of flexible was always an important political and legal argument in Germany.
The FT quotes Thomas Wieser, head of the euro working group, as saying that Spain’s bailout would start under current rules, but “the loans could quickly be moved off Madrid’s sovereign books once the new bank supervisor was in place.” (This suggests to us that they are trying to do this without any changes to the ESM treaty. Otherwise it could not be done quickly.) Angela Merkel also said that what matter to her was that everything that was agreed remained with the existing instruments. No new instruments were created.
From the various reports this mornings, we could ascertain the following components of the agreement:
El Pais reports that Mariano Rajoy looked visibly pleased but did not say anything. Monti declared a double-victory for Italy. The media headlines said Merkel had been pushed into a corner.
The following are a list of questions that immediately sprung to our mind:
There is, hopefully, more detail to come this morning. Our first assessment is that eurozone leaders probably did enough to ward off an immediate crisis next week, but the sustainability of the eurozone is no way improved. The agreement is subject to implementation risk, and the curse of the small print. And without an increase in the size of the ESM, or more likely without an ESM banking licence, the new activities might quickly exhaust the ESM’s capacities.
And here is some of the other news:
No complete overhaul of the bailout terms wanted after all
Antonis Samaras, meanwhile, insisted the government would meet its targets as long as some “modifications” are made, lowering expectations at home about any substantial reworking of the terms of its bailout, as suggested by the coalition policy programme. Sources told Kathimerini that the government aims now to meet these targets over its full four-year term rather than ‘immediately’. Samaras letter to the other leaders says: “The new government of Greece accepts ownership of the adjustment program and is fully committed to its targets, its objectives and all its key policies”. The premier pledged to speed up some aspects of the programme, such as the stalled privatisation scheme, but added that Greece would need modifications to due to unprecedented unemployment and a much-deeper-than-expected recession. In an interview with the Wall Street Journal deputy finance minister Christos Staikouras reinforces the case, using the latest forecast, a contraction of 6.7% this year, to contrast with the 1% growth assumption in the medium-term plan projection, as an argument that “something has to change”.
IMF ready to consider Greek loan changes
An IMF team will start negotiating possible changes to the loan conditions for Greece after a fact-checking visit to Athens early next week, the IMF spokesman Gerry Rice said. Bloomberg quotes him saying: “The objectives of the programme as agreed remain the basis for those discussions…If the new government has ideas on how those program objectives can be achieved, we’re open to those discussions.”
No crowny capitalism after all
Samarras’ Alexandros Tourkolias will not take over as chairman but as CEO of the National Bank. The chairman will be Giorgios Zanias, as soon as he completes his work as caretaker finance minister.
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