Financiers give guarded welcome to Merkel-Sarkozy meeting
The financial community has welcomed the fact German Chancellor Angela Merkel and French president Nicolas Sarkozy met yesterday to discuss the eurozone’s ongoing financial crisis, but expressed disappointment leaders of the currency bloc’s two largest economies did not make more from it.
The meeting seemed to quash any hope for a Eurobond underwritten jointly by eurozone members as a way to salvage Europe’s beleaguered economies.
Sarkozy said the bonds “would consist of underwriting the debt of all eurozone member states, without control over the spending of those states,” while Merkel dubbed them a “last resort”.
The two leaders did, however, propose a new political structure for the region in which President of the European Council Herman van Rompuy oversees debt repayment by beleaguered countries; imposing limits on member states’ deficits by summer 2012; a harmonised corporate tax rate from 2013; and a tax on EU financial transactions.
Nigel Sillis, director of research for fixed income and currency at Baring Asset Management, said the meeting “still leaves us cautious on the prospects for European sovereign bonds, [and] is perhaps a step forward, but less than the market was looking for.”
He noted markets would focus mainly on any further details on proposals for the financial tax – “attractive to governments looking to raise revenue and dampen down market speculation, but potentially reducing Europe’s competitiveness versus other global financial centres”.
The proposal was greeted by howls of discontent in London’s financial district today, and by newspapers more sympathetic to the importance of the ‘Square Mile’ to Great Britain’s economy.
Eric Siegloff (pictured), global head of strategy and tactical asset allocation at ING Investment Management, named the continuing European sovereign stress as one of three things concerning him now. US debt and fiscal policy, and a downshift in global economic growth, are the others.
“While we have seen further liquidity support from policymakers, there is a need for medium- to long-term policy-setting aimed at alleviating these structural concerns. As things stand currently, we think it appropriate to be positioned for downside risks,” he said.
Siegloff said ultimately Europe will have to move to “some sort of fiscal union, with attendant loss of sovereignty for participants”. Corporate balance sheets were restored after the 2008 financial crisis, he noted, and households are in reparation mode, “but now it falls on governments to address their imbalances”.
Baring’s Sillis noted disappointment no pledges came from the politicians’ meeting to reinforce the European Financial Stability Fund, despite financiers’ calls beforehand to boost it by three to four times its present €440bn.
“This is what markets were really hoping to hear, although investors may have been a little optimistic in expecting progress on this issue to be rapid,” Sillis said.
“A requirement to make balanced budgets a constitutional requirement could have teeth, but any changes would need to be agreed by the other Eurozone members, and investors are likely to be sceptical given the problems which have come to light with application of the Maastricht criteria when the Eurozone was formed.”
Following the meeting, French President Nicolas Sarkozy said the proposal of Eurobonds – advocated by leaders of some beleaguered eurozone countries but rejected by rulers in its core – “can be imagined one day, but at the end of the European integration process, not at the beginning”.
This disappointed investment director at Montague Capital, David Jones, who said dismissing them was wrong: “Perhaps the way forward is to work harder on the topic of eurozone bonds, rather than say they are off the table even before the serious talking begins.