Europe blog – Exit polls: pro-European parties gain consesus in Dutch elections

22.15 – According to Dutch exit polls, the VVD centre-right party of outgoing Prime Minister Mark Rutte will take 41 of the 150 seats in the lower house of parliament while Labour will have 40.

VVD would take one seat more than the centre-left Labour Party led by Diederik Samsom.

Both parties are centrist and pro-European. The same exit poll suggests the populist Freedom Party faces heavy losses.

The two parties could theoretically form a new coalition government but their leaders played down such a possibility during the campaign.

4.15 – German Court ruling kicks the can down the road

“The can has been kicked down the road – but for how long?” asks Christopher Vecchio, Currency Analyst at DailyFX. “Essentially, what we have now in Europe is the bailout fund, the ESM, leveraged by the ECB to implement soft caps on sovereign yields. But for the ECB to actually buy bonds, the sovereign must agree to new reforms and international oversight in the form of the European Troika (the ECB, EC and IMF), a tiny condition that Italy and Spain have thus far publicly decried as unacceptable.

 “Which leads us to the obvious conclusion: if Italy and Spain don’t apply for bailout assistance, thus rendering the ECB’s plan inactive, will promises that a floor is in place be enough to quell contagion fears? Accordingly, we believe that any implied intent to seek help from the ESM will have diminishing returns before market participants call the bluff of Italy and Spain.”

3.50 – EU policy makers are ticking all the right boxes

The German court ruling, that the country’s liability cannot exceed €190bn without approval of the lower house of Parliament, is a very light form of conditionality, said Cosimo Marasciulo, Head of European Government Bonds and FX at Pioneer Investments. “This is probably the lightest we could have expected. In the Eurozone, little by little, policy makers are ticking all the boxes and the ECB has cut the potential tail event,” he said. “This leaves us with market participants generally short/underweight of Peripheral govies and valuations look still very attractive. “We think the tightening move will continue in Q4 with lower volatility. This will convince investors to return to the peripheral bond market again.”

2.45 – German Court decision gives Eurozone breathing space

The eurozone has now bought itself some time, said Gavyn Davies, chairman of Fulcrum Asset Management, and former head of the global economics department at Goldman Sachs, writing in the FT. “But it is still very doubtful whether ECB action, along with the arrival of the ESM, will be enough to defuse the crisis on a permanent basis. The German strategy remains essentially an austerity strategy, and without growth it may still eventually fail in the ultimate court of democratic opinion.”

2.29 – Peripherals’ debt strengthens

Peripheral government debt continues to strengthen this morning. Spanish yields are down 6-8bp in the 10-year maturity this morning, while the decrease in the short end of the curve is less pronounced at 2-3bp. Italian government bonds are 3-15bp lower across the curve. Greek yields are falling by 30-40bp and Portuguese by 5-10bp.

13.58 – National supervisors will retain responsibility

Barnier says national supervisors will retain responsibility, especially with regards to the protection of consumers. Those not in the euro area but in the EU may decide to join, but if they don’t supervision in their countries will not change at all. Barnier declined to name countries that have expressed a wish to join, but said some are “seriously thinking about this possibility already” and insisted they will have access to the same information that existing Eurozone members. He also called for a more stringent deposit protection scheme, with a clear “recovery and resolution framework”.

13.52 – Watch live coverage of EU press conference

Watch live coverage of the press conference held by Michel Barnier, the EU Commissioner responsible for internal market and services, covering banking supervision proposals outlined by Mr Barroso this morning.

EU press conference live.

13.47 -Italy’s PM welcomes banking supervision proposal

Italy’s prime minister Mario Monti welcomed Barroso’s speech as “full of the vigour necessary to push further European integration” and said the country supports Europe’s proposal on banking supervision.

At a press conference in Rome eh said: “It’s great news as [the German constitutional court’s decision] removes the last obstacle to the application of the stability treaty and the agreements of the fiscal compact.”

13.38 – Watch a video on how the EU is tackling the financial crisis. Link below.

Emerging stronger form the crisis: the European vision.

13.33 – Investec stays away from European bonds

Despite the positive shift in investor confidence following the ECB’s announcement and today’s ruling from the German court, Investec Asset Management still prefers to hold bonds with minimal exposure to the Eurozone. It is looking to Canada, Sweden and Norway, as well as some emerging market regions, for example South Africa.

Russell Silberston, Investec’s head of developed rates & currency, says: “We prefer higher yielding countries that we believe are safer and more secure – Canada, Australia, Sweden, and Norway, for example, which should offer superior returns. It is no surprise the currencies here have been very firm.”

There are no Spanish and Italian bonds in the portfolio, because they are continuing to behave like risky assets. Silberston comments: “Risky assets and high yield have their place, but when you buy that sort of asset you need to understand the balance sheet. Conversely, when you buy the bond, you’re buying into the solvency of a government and that’s the real issue. So we’ve avoided it.”

He added that the plans for ‘unlimited intervention’ recently unveiled by the ECB may have “unintended consequences”, causing a fundamental shift in bond sentiment.

He questions: “What is an investor’s reason for buying government bonds? Fundamentally, investors’ reasons for purchasing government bonds relate to the relative safety, security and stability of the investment. Yet there has been a wholesale shift in the behaviour of this bond market, with extreme volatility occurring in Italian and Spanish bond markets.”

13.17 – ABN-AMRO increases exposure to Europe

Reuters reports ABN-AMRO has invested in European financial and industrials within its global equities portfolio, as the ESM ruling has and positive sentiment in the Eurozone have improved investor sentiment.

Didier Duret, CIO at ABN-AMRO Private Banking, said: “[ESM’s ruling is] a confirmation that Germany is engaged in the project to rebuild and reconstruct Europe. There is a kind of Draghi economics going on. There is a clear receding risk of a euro break up and people are readjusting their portfolios.”

He sees an 8% – 10% upside potential for the Euro zone’s blue chip Euro STOXX 50 index by the end of the year.

13.10 – European shares hit record high

European shares have hit their highest point since last July. The FTSE Eurofirst 300 index is up 0.3% today.

13.01 – Merkel wants quality, not quantity in banking supervision

Berlin’s Angela Merkel insisted that the proposed European banking supervision programme must be effective in terms of quality, and not merely quantity, reflecting Germany’s doubts about having too many small banks in the European system.She also said EU leaders will have a major discussion on further steps in EU integration at their summit in December. The “democratic legitimacy” of the process will be at the forefront of the discussion.

Today’s decision from the German Constitutional Court in Karlsruhe is a major victory for Angela Merkel and for Germany’s preferred approach to handling the eurozone crisis, write the FT.

Economics expert Gavyn Davies writes in his FT blog: “It looks like a comprehensive defeat for those trying to mobilise political opinion inside Germany to block the treaty.As a result, the ESM and the fiscal compact can now be safely launched, and any immediate obstacle to Mario Draghi’s bond buying plan at the ECB has disappeared.”

12.51 – Germany, Austria supportive of ESM, ECB ruling

Austria’s finance minister Maria Fekter describes the ESM ruling and ECB’s bond buying plan as “milestones” for “stable crisis infrastructure”.

She told a local press agency Austria is prepated to transfer its first €900m tranche to the permanent bail-out fund this autumn.

Meanwhile, Germany’s finance minister Wolfgang Schaeuble welcomes EU’s proposals for banking supervision, but calls for realism on its scope and implementation timeline.

In a statement, he said the ECB should focus on the supervision of “systemically-relevant banks for the time being” as it can’t oversee 6,000 banks in Europe in the short term. He added that ESM could be operational “within a few weeks”.

12.44 -Election won’t affect Netherlands position in EU

Netherlands is likely to remain an awkward, tough-talking member of the single currency area, Reuters says.

The Netherlands is likely to continue strongly resisting transfers to euro zone debtors, regardless of who wins the most seats in the election.
Opinion polls on Tuesday showed the Liberals and Labour on 36 seats each or the Liberals fractionally in front, with the hard-left Socialists and the far-right anti-immigration Freedom Party fading in third and fourth place respectively.

That makes it more likely, though not certain, that Liberal Mark Rutte, with the strongest international profile, will stay as premier.

12.36 – Top five quotes from President Barroso:

1. “We are accountable to Europe’s people, we need to have them with us in a federation for the citizens”2. “We need a European democracy that is built to compliment national democracies across EU”

3. “To say no to Europe is easy”

4. “If some members don’t want this, they can of course, but they shouldn’t hinder the rest.”

5. “We need a true European democracy with truly European political parties”

12.28 – Netherlands votes results ready tonight

Results on votes in the Netherlands will be available late tonight. So far, the Netherlands has supported Germany’s austerity and integration agenda. The elections feature 21 parties and over 650 candidates.

12.18 – German market rallies 0.9%.

In reaction to the approval of the permanent bailout packages, Germany’s market is up 0.9%. German Bund futures fell to a session low of 139.75.

12.09 – Protests continue in Athens

In Athens, protests continue over €12bn package of budget cuts. University professors, doctors, municipal employees and military workers have taken to the streets to dispute the austerity measures proposed by Greece’s troika of creditors.

A 300 person rally was organized by the Federation of Greek Universities Teaching and Research Staff Associations (P.O.S.D.E.P.) which has proposed to the teachers’ associations to continue the strike until Friday, September 21.

12.00 – The German ruling has pushed EUR/USD above 1.29.

The pair is currently trading at 1.2918. Since a two-year low of 1.2042 in late July, the euro has risen steadily over the last weeks, as confidence towards eurozone assets improved after the European Central Bank unveiled a plan to lower peripheral countries’ borrowing costs.

11.52 – AFME welcomes proposal on EU banking supervision

Industry lobby group ‘Association for Financial Markets in Europe’ welcomed the Commission’s proposals on banking supervision.

“The Commission’s proposal are a vital step towards restoring confidence in Europe’s financial system and wider economy.

Creating a strong banking union, built around a credible and effective single supervisor, should break the link between the solvency of Europe’s banks and its sovereigns, which has been a significant cause of instability in recent years,” said chief executive Simon Lewis.

He added that key issues to be resolved include the implications for the Single Market; the allocation of responsibilities between the ECB and national supervisors within and outside the banking union; and the essential backstop arrangements for resolution and depositor protection.

Details on the proposal can be found here.

11.43 – Rajoy: bail-out decision based on borrowing costs level

Addressing the parliament today, Spanish prime minister Mariano Rajoy said he will monitor the nation’s borrowing costs before a final decision on a full-scale rescue.

Deputy economy minister Fernando Jimenez Latorre said there is no urgency over Spain’s decision as the country could now issue debt in more comfortable conditions.

Meanwhile, German Chancellor Angela Merkel described today’s ruling as a good day for Germany and Europe.

11.27 – S&P: no rating impact

The German court backing for ESM has won’t have a rating impact, S&P Bulletin.

11.22 – German ruling a “yes-but” answer, Bruegel warns

The German constitutional court has given a “yes-but” answer to the ESM treaty, warned Guntram Wolff, deputy director of economic think tank Bruegel.

“The first but refers to article 8(5), sentence 1 which states ‘the liability of each ESM Member shall be limited, in all circumstances, to its portion of the authorised capital stock at its issue price.’
The crucial point here is the reference to the “issue price”. A number of German critiques had previously argued that the German liability was not limited to 190bn as is explicitly stated in Article 8(1) but could be higher if the issue price of the authorised capital stock is increased,” he said.

The second but refers to Article 32 (5), Artikel 34 and Article 35 (1).
“The court demands here that the two chamber of the German parliament (Bundestag und Bundesrat) need to be fully informed. In the reading of the court, the three articles could be read in a way that this full information of the parliament is restricted. And indeed, Article 34 grants professional secrecy to the ESM governors, i.e. the ministers, and directors. This would essentially remove them from their obligation to fully inform their national parliament and may even in some circumstances restrict their scope to inform the parliament,” he added.
The English link of the German ruling can be found here.

11.05 – ECB welcomes proposal for single supervisory mechanism

The European Central Bank has welcomed the European Commission’s proposal for a council regulation establishing a single supervisory mechanism involving the ECB.
“The proposal, which the ECB’s Governing Council will formally assess in detail in a legal opinion, is an important step towards laying the foundations of a financial market union with the view to ensuring financial stability in the euro area and the European Union,” a spokeperson said.

10.50 – Junker confirms ESM start date

Eurogroup chief Jean-Claude Juncker confirms the European Stability Mechanism (ESM) will start to operate on October 8, with the first meeting of the board. In 2013 the mechanism will be fully operational.

10.42 – German ruling supports Italy’s debt auction

The ruling of the German court has supported Italy’s debt auction, which has sold one-year bills at the lowest rate since March. The Italian debt agency sold €9bn one-year bonds at an average yield of 1.692%, compared to 2.768% on August 13.

10.27 -EC proposes single system of supervision for eurozone banks

The European Commission has proposed a single system of supervision for Eurozone banks, led by the European Central Bank. This will help ensure banks stick to sound financial practice, help tackle the sovereign debt crisis and help prevent future crises.

The new system will also help to protect the UK financial system and there will be strong safeguards to protect the interests of the UK and other non-euro area countries.
According to the proposal, UK regulators and supervisors will retain all their existing powers and prerogatives. UK supervisors will remain fully responsible for supervising UK banks operating in the UK. They will also, as now, under the “home/host” system, continue to supervise UK banks operating elsewhere in the EU and EU banks operating in the UK, in cooperation with supervisors from the other Member States involved.

“We want to break the vicious link between sovereigns and their banks. In the future, bankers’ losses should no longer become the people’s debt, putting into doubt the financial stability of whole countries,” Barroso said.

10.13 – Fears remain over stability of US economy

“The market is unanimous in its belief that the German Constitutional Court will today give the green light to the ESM,” said Andrey Dirgin, head of research at Forex Club, commenting on today’s German court ruling on the euro bailout fund.
According to Dirgin, fears over the stability of the US economy have been raised again, with several ratings agencies acknowledging the possibility of a US downgrade from its current AAA ratings if it fails to get spending under tighter control.

“As a result of these factors USD trader lower today, supporting the risk assets. EUR/USD started the day at 1.2852 reached a morning high of 1.2885 and continues to climb. There is every chance that the pair will reach 1.30, breaking the1.29 interim resistance level on the decision of the German Constitutional Court. The main fear is that the Court will attach some conditions to the approval. If so we would expect a fall to 1.2770 followed by 1.27.

10.05 -Italy, Spain yields to fresh lows

Following German approval of the €700bn European Stability Mechanism, Spanish and Italian yields fell to fresh six-month lows.
Ten-year Spanish yields were down at 5.62% from 5.70% before the court verdict. Ten-year Italian yields were at 5.03%, having stood at 5.09% before the ruling.

09.50 UK risk management software firm Xactium says the suggestion in this morning’s speech by EC president Manuel Barroso that the ECB could become a ‘super regulator’ poses particular risks. Regulators taking longer to vet new businesses may not be condusive to shrinking economies, and there is a practical problem facing the ECB in monitoring 27 nations. “One thing is certain, the financial services industry must active in aligning its risk process in accordance with national or multinational regulators,” Xactium said.

09.40 European shares rose and Bunds fell after the ESM decision reports Bloomberg. As of 09.20 UK time the Stoxx Europe 600 was up 0.6%, the euro was up 0.3% against the dollar, and the yield on the 10-year Bund rose 4bps.

09.35 Germany can fund the European Stability Mechanism (ESM), as long as there is no increase in financial exposure without parliamentary approval, Germany’s Federal Constitutional Court has ruled. Liabilities beyond €190bn must be approved by the Bundestag. And both houses of parliament must be told how the money is being spent.

09.15 FX specialist Clear Currency said in a morning note that “It’s no secret of the growing frustration in Germany about the Euro. Many see a return to the Deustche Mark as a viable option with the German people then in charge of Germanys destiny.”
The country’s Federal Constitutional Court rules today on the legality of the ESM measures proposed by chancellor Angela Merkel’s government.

08.42 EC president Barroso has proposed a “federation of nation states” as the path to deeper EU integration. This will require EU Treaty changes, which will be proposed by the EC ahead of European elections in 2014. Only Treaty changes can ensure such deeper integration, he said.

08.38 A Single Supervisory Mechanism for improving supervision of all banks across the eurozone, and as a step towards full banking union as proposed by Barroso in June, is to be pushed by the EC as a “precondition to better supervision of the banking system.”

08.33 Greece should remain a fully fledged member of the eurozone if it sticks to its commitments. The ECB cannot finance governments, but it has a right and a duty to restore integrity of monetary policy.

08.30 EC President Barroso says the EC will be putting forward a Single Market Act II, as part of its response to the need to encourage economic growth across the EU.

08.25 Europe needs to reform, but there must be no doubt about the integrity of the Union or the viability of the euro. Stronger countries must leave no doubt about their willingness to stick together, argues Barroso.

08.20 “It is time to learn the lessons from history and write a better future for Europe,” says EC president Barroso. Follow the speech here:

08.10 Barroso has started his State of the Union speech by saying that Europe “needs a new direction, which cannot be based on old ideas.”

18.20 Tuesday – ABN Amro’s previews of the Dutch elections can be read here Dutch economy in focus and here Dutch elections update


EC president Manuel Barro will be following up his State of the Union address on 12 September with a Question and Answer session on 19 September hosted by the European Commission’s media channel.


InvestmentEurope’s writers will be blogging live through Wednesday, 12 September, when the Dutch go to the polls, the German Federal Constitutional Court rules on the validity of the ESM, and EC president Barroso delivers his State of the Union address.

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