Veritas: For the EU Summit, it’s already the day after

The first day of the EU Summit (held today and tomorrow in Brussels) is already the day after.

The day after …the downgrade of Germany’s rating to single A+ by independent rating agency Egan-Jones. Over the last months its independent status has put Egan-Jones ahead of the curve for rating changes, followed by the three big sisters Standard & Poor’s, Fitch Ratings and Moody’s, all of which maintain a stable outlook and a triple A on the country.

The day after …Germany’s “nein” to the eurobonds. Chancellor Angela Merkel has said she will not agree to have a shared liability of debt “as long as she lives”. Hours after Merkel’s comments, German finance minister Wolfgang Schäuble told the Wall Street Journal: “Germany could agree to some form of debt mutualisation as soon as Berlin is convinced that the path toward establishing centralized European controls over national fiscal policy is irreversible”.

Again, and still before any news from the summit, Martin Kotthaus, Schaeuble’s chief spokesman, emailed: “At the end of a development toward a true and stable fiscal union, one can talk about joint debt management. But only then.”

Such comments should not be taken literally, according to Peter O’Flanagan, head of foreign exchange Trading at Clear Currency. “The reality is that as we approach the 19th EU summit in three years market expectations remain low. A common eurozone bond appears to be the most touted solution at the moment but Merkel’s language and constant insistence suggest that Germany is unwilling to budge on this issue,” he said.

The day after… as markets have anticipated failure. John Redwood, chairman of Evercore Pan-Asset’s Investment committee, points out: “This time the markets have fallen in advance of a summit to save the euro. The spin has not worked,” he said.

The price for German agreement to take the debt of the rest of the eurozone on its shoulders will be more political commitment. “As the German Finance Minister said again, ‘We need more, not less Europe’,” Redwood said.

But political deals take time. Meanwhile, markets move on in the wrong direction for the single currency. “There have been more downgrades of banks and countries within the zone…Share markets in the worst affected countries have been very weak. Recession stalks many of the troubled Euro countries, making it even more difficult for them to get out of deficit and to start reducing their debts,” said Redwood.

European finance officials in Brussels are already, once again, discussing short-term ways to bring Spanish and Italian borrowing costs to a sustainable level. Said French President Francois Hollande: “I have come here to get very rapid solutions to support countries in the greatest difficulty on the markets, even though they have made considerable efforts to restore their public finances.”

Hopes are for an agreement to be reached on temporary EFSF rescue fund and more permanent ESM bailout fund, which would buy Spanish and Italian bonds to underpin their bond auctions.

The day after this summit…the light at the end of the tunnel could be discussed.



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