We noted that the Friday media comments on the summit were generally positive, but subsequent commentary was more cautious, in some cases even negative. There were no new major political development since the summit – the reaction in Germany was negative initially, but there was no widespread sense of outrage.

The market reaction was unrestrained optimistic on Friday. It was without a doubt a proper market rally. Spanish spreads were down some 60bp, and equities were up everywhere. And it lasted all day, and was not reversed in overnight trading this morning. But as the FT writes, the markets are still not entirely convinced that this deal for real. They applauded the bond purchasing mandate and the direct equity injections, and of course the future role of the ECB as a bank supervisor, but there “nagging doubts” whether this deal really amounted to the silver bullet that some made it out to be.  

 

FT says it was a very good agreement

 

In its main editorial on the summit, the FT says it was a very good deal because leaders staked out a pathway towards a global solution – via a banking union. It noted the dramatic market response on Irish bond yields, based on the statement that similar case would be treated in a similar way. There was now a hope that Ireland may regain access to the markets again.

 

Günter Nonnenmacher warns of a backlash against those who blackmailed Merkel in Brussels

 

In a surprisingly mild comment Frankfurter Allgemeine Zeitung’s political editor Günter Nonnenmacher endorses the summit results in principle. “It is the very essence of all negotiations especially in the EU that all participants have to compromise from their starting positions”, Nonnenmacher argues. “That is also true for Germany, even though it is the main pillar of the currency zone.” However, the tactical moves to get to the compromise are yet another story, he writes. “Mrs. Merkel was brutally blackmailed by politicians from the South, like the Italian Monti, the Spaniard Rajoy (supported by the French Hollande) because their countries needed quick help and despite the fact that they share German basic beliefs in principle”, Nonnenmacher notes. He continues by pointing out that “political alpha animals” like Merkel had long memories and that Hollande with whom the chancellor has a strained relationship would be paid back in kind by Merkel at the next possible opportunity.

 

Roberto Napoletano says the real work has yet to start

 

Writing in Il Sole 24 ore, Roberto Napoletano says that it was now time to move from words to deeds, and decide how the primary and secondary market activities are being funded, whether there will be a banking licence for the EFSF/ESM, and how to recapitalise the Spanish banks directly. He writes that details matter. The good news is that the European Council has given out a clear signal that it is embarking on the creation of a United States of Europe.

 

Wolfgang Munchau says Angela Merkel was the true winner of the summit after all

 

Wolfgang Munchau writes in his FT column that the summit deal looked like a political victory of Mario Monti over Angela Merkel. But the reality is different. The deal will do nothing for Italy because the main problem for Italy is not the procedural rules of the ESM – which have not changed all that much anyway – but its size. The problem is that the ESM is simply overloaded with Greece, Ireland, Portugal, Spain and Italy. Merkel has managed to keep Germany’s total liabilities constant. Munchau writes that the agreement for Spain is marginally better, but it faces three huge implementation problems, which the markets may not be seeing as yet: the first is that the conditionality on a deal on bank supervision is not trivial; the second is this may require an ESM-Treaty change as the current treaty makes an explicit reference to equity injections; and third, since the European banking system is woefully undercapitalised, the Italy  problem applies here too: the ESM is simply too small.

 

Mark Schieritz says the agreement is not what it appears to be

 

Mark Schieritz also debunks the notion that the summit representated a victory over Germany. He says the size of the ESM has been left unchanged, and the direct bank recapitalisation route will take longer to set up than some people might hope for. He also makes an important point about seniority. Agreements to change the seniority matter little in practice, as we have seen when the ECB pushed through its interest in respect of Greek shares. The public sector will always find a way to push through its interests.

 

Tsipras wants Greece to veto or get same deal as Spain

 

Alexis Tsipras, the leader of the main opposition party SYRIZA, called on the Greek government to veto the new agreement to prop up banks unless Greece is allowed to benefit from it in the same way as Italy and Spain, Kathimerini reports. Tsipras accused the government of “looking on from afar as Angela Merkel made concessions and not having the essential boldness to ask for Greece to be given the same treatment.” Government spokesman Simos Kedikoglou, who has accused Tsipras of undermining the government’s efforts to negotiate with creditors, responded  by saying that “the government will continue to strive to modify those policies that are leading the country into recession and thousands of Greeks into unemployment.”

 

The Irish want their bank deal too

 

With the Spanish bank deal in their back the Irish government is starting serious negotiations with the EU next week to get substantial reductions for its own bank debts. Irish prime minister’s spokesman said last night that there are similarities to the Spanish case there were important differences, not least that Spain does not have the same retrospection issue as Ireland. The Irish Times writes that officials are working on a possible cut of some €34bn, about half of total €63bn spent to date on bailing out the banks. A successful resolution is expected to lower Ireland’s overall debt fall from a peak of 117% to 100% of GDP. Finance minister Michael Noonan said over the weekend he wanted a successful outcome on the bank debt issue before the budget in December, which practically means before the next EU summit in late October.

 

John McHale warns the Irish not to get carried away

 

Writing in the Irish economy blog, John McHale urges caution.

“While the euro zone leaders’ summit certainly exceeded expectations, the shift from dire pessimism to elation in the Irish press reaction over the last few days seems overdone. The big question across numerous articles seems to be how much of the €63 billion put into the banks will now be mutualised.   Unfortunately, I don’t see anything in the post-summit statement that leads me to revise a view that the chances of other European countries absorbing already crystallised losses in the Irish banks are approaching zero – the ‘similar treatment’ statement notwithstanding.   More positively, the chances of beneficially refinancing the promissory notes/ELA arrangement looks to have  increased, which (depending on the details) could lead to a large NPV benefit, and thus significantly reduce the burden of banking-related debt. While this might partly explain the fall in bond yields, my guess is that the majority of the fall reflects a decline in the chances of a major euro zone crisis following financing difficulties in Italy and Spain. Excessively hyping what has been achieved runs the risk of later disappointment, undermining support for unavoidable adjustment efforts.”

 

The European ball now passes… to the German Constitutional Court

After the two thirds majority in Bundestag Friday afternoon Germany’s constitutional court in Karlsruhe now has the last word over the ESM, Frankfurter Allgemeine Zeitung reports. There are several groups of parliamentarians and the parliamentary group of the Left which will launch complaints in Karlsruhe. Karl Albrecht Schachtschneider, a law professor representing one of the groups, said that the ESM amounted to the creeping establishment of a federal order in Europe. According to him the German parliament is handing over its budgetary sovereignty for good without the people being asked if they approve of such a far reaching move in a referendum. There is also, in parallel, a number of complaints against the fiscal pact, but it does not come into force until 2013.

 

French banks reduce Greek exposure

Crédit Agricole is the latest wanting to sell its stakes in Greece, currently in talks to sell its Greek Emporiki Bank unit.  The FT reported last Friday that the French bank has received interest from three Greek lenders. Crédit Agricole invited local banks to submit offers for a majority stake in Emporiki earlier this month as fears mounted of a run on Greek banks. Depositors withdrew more than €10bn ahead of the June 17 general election, although €2bn has since returned, according to finance ministry officials. Reuters writes that French banks, the top foreign lenders to Greece with an estimated cross-border Greek exposure of €34.9bn at end-December, have been cutting back their exposure since 2011 via sales of sovereign debt and writedowns of their holdings in Greece.

 

Clear majority of bank economists expects the ESB to cut policy rates

A clear majority of 25 out of 35 bank economists expect the ECB to cut its policy rate of currently 1.0% at the ECB council meeting this Thursday, Financial Times Deutschland’s monthly rate survey shows. 20 of the polled economists expect a cut by 25bp to 0.75%, 5 expect even 50 bp to 0.5% while the remaining 10 think the ECB will hold rates at the current level.

 

Spain expects recession to have accelerated in Q2

El Pais has the story that economy minister Luis de Guindos warned that the Spanish recession had worsened during Q2, predict a slightly higher fall than during Q1, when it was minus 0.3% qoq. The paper points out that this was in line with a preliminary assessment by the Bank of Spain. But the Spanish government maintains its overall forecast of a 1.7% decline for the year as a whole, and de Guindos said Spain was still on target to stabilise in the coming months.

 

The French court of auditors will point to €1.5bn of non-financed public expenditure in France

According to Les Echos the court of auditors will today in its special report to prime minister Jean-Marc Ayrault point to €1.5bn of non-financed public expenditure in France. Pierre Moscovici yesterday confirmed the information and added that other than that the report on France’s current state of public finances will not contain major surprises. According to the paper it will stress that €7.5bn to €8bn are lacking in this year’s budget if France is to fulfil its EU obligation of bringing the deficit down to 4.5% of GDP this year. In response to the budgetary shortfalls Ayrault will impose a general public spending freeze and confiscate a certain amount of money from the ministry’s individual budgets as they had been foreseen individually. France’s situation is further complicated by the fact that growth this year is likely to be only 0.4% instead of 0.5%.

 

Asmussen about Greece: we can tweak, but targets remain

 

There may be some room for small changes in Greece’s bailout plan, as on the condition that these changes do not affect its targets, ECB board member Joerg Asmussen said in an interview with Kathimerini. “If [Antonis Samaras] wants to change the mixture of the revenue and expenditure measures this can surely be discussed. But with respect to the key results and goals of the program to make Greece more competitive and to reach a debt sustainability situation, I do not see room for change… And if the fiscal goals are shifted by one or two years into the future, that would immediately require additional external financing from the eurozone partners and the IMF.”

 

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

 

The summit effect. But we are only back to the levels of about a couple of weeks ago.

10-year spreads
	Previous day	Yesterday	This Morning
France	1.161	1.118	1.127
Italy	4.681	4.357	4.350
Spain	5.404	4.757	4.814
Portugal	8.808	8.656	8.964
Greece	25.162	24.466	#VALUE!
Ireland	5.627	4.837	5.191
Belgium	1.735	1.623	1.686
Bund Yield	1.511	1.582	1.589
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.258	1.2626
Yen	99.750	100.68
Pound	0.806	0.8059
Swiss Franc	1.201	1.2012
ZC Inflation Swaps
	previous	last close
1 yr	1.19	1.11
2 yr	1.15	1.28
5 yr	1.5	1.51
10 yr	1.77	1.77
Euribor-OIS Spread
	previous	last close
1 Week	-4.614	-6.814
1 Month	3.029	4.629
3 Months	29.371	30.871
1 Year	95.479	94.479
Source: Reuters