EU Summit a victory for peripheral countries, says Ted Scott
The EU Summit held in Brussels on June 28 and 29, can be seen as a victory for peripherals against core countries, led by Germany, according to Ted Scott, director of global strategy at F&C investments.
“Overall, the summit went further than might have been expected thanks to some skilful and risky brinkmanship by Mario Monti of Italy. The main advance has been some real progress towards a banking union,” he said.
Among the positive oucomes of the two-day meeting has been the significant progress towards the creation of a banking union, with the creation of a single bank regulator and supervisory mechanism that will involve the ECB, Scott said.
He added: “The ESM, the new bail out body that begins its existence next month, will have the authority to directly recapitalise banks. This means the funds will not go via the sovereign, as had originally been agreed with the Spanish bank bailout, and therefore it will not add to the overall debt burden of the country concerned. The loans that the ESM provides will not rank superior to existing debt and, therefore, do not subordinate the private sector”.
Moreover, a growth pact of €120bn has been agreed. It will involve extending the capitalisation of the European Investment Bank that finances much of the projects, allocating structural funds and implementing pilot programmes for project bonds.
Italy and Spain also pushed towards the agreement on bailout funds, which will now be able to directly buy debt in the market.
“From a legal point of view the funds already had the power to do so but there had been a reluctance to use the resources of the funds to intervene directly in the bond markets, especially from Germany. By sanctioning the purchase of bonds by the funds it presumably means that the ECB will suspend its own securities market programme,” Scott said.
On the other hand, EU leaders did not announce a move towards debt mutualisation through the creation of Eurobills.
“A lot of uncertainty remains about the details, timing and national approval with direct recapitalisation having to be agreed by all countries in each case. So the summit is not exactly a silver bullet,” said Michael Krautzberger, head of European fundamental fixed income at BlackRock.
However, he added, some problems such as the sovereign/ banking sector vicious loop and the undermining effect of seniority in any intervention have been clearly recognized and begun to be addressed. Therefore, some of the biggest concerns in Spain and Ireland are starting to be tackled.
“Hence, the eurozone remains a long way from fiscal integration that would involve the sharing of debt and overall controls of spending and budgetary decisions. This is regarded as a sine qua non for a sustainable solution of the crisis in the absence of a break-up,” Scott said.
The outcome of the Summit was well received by markets, with equity markets up between 1% and 2% and periphery bond yields falling on June 29.
“The rally partly reflects the low expectations going into the meeting although there have been some significant measures agreed, especially with respect to the banking sector. It is being seen as a victory for the peripherals,” Scott said.