Europe leaps a puddle

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Quite a lot of action in Euroland last night. Firstly the big news, although completely expected, was that the Constitutional Court rejected a series of lawsuits aimed at blocking Germany’s participation in the Euro bailouts but handed more power to the German parliament around the decision making process:

Germany’s top court handed its country’s parliament a greater say over euro zone bailouts, potentially hampering Berlin’s ability to act decisively against a debt crisis which Chancellor Angela Merkel said needed a fundamental rethink to solve.

The Constitutional Court rejected a series of lawsuits aimed at blocking the participation of Europe’s biggest economy in emergency loan packages but said the government must get approval from parliament’s budget committee before granting such aid.

“This was a very tight decision. But it should not be mistakenly interpreted as a constitutional blank check authorizing further rescue measures,” the judge told plaintiffs, government officials and members of parliament in the courtroom in Karlsruhe.

This is pretty much as expected, with a minor victory for Merkel in that she must only get approval from parliament’s budget committee rather than a full parliamentary vote. The downside to the ruling is that it suggests that supra-european debt instruments are a no-go:

Markets breathed a sigh of relief Wednesday after Germany’s Constitutional Court ruled the country’s participation in Europe’s bailouts was legal. In truth, it always was likely the court would do so. But future bailouts will face greater parliamentary oversight. More significantly, the court’s ruling also points to constitutional difficulties if the euro zone pursues real fiscal integration, including common-bond issuance.

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Not that this matters at this stage because in her speech to parliament after the announcement Ms Merkel made it very clear that Euro-bonds were off the table even though she was aware that this would mean that European governments would take longer to recover. It looks like whatever the plan is now is “the plan”. The court result has made it very clear what the limits of German participation in the European bailout program are.

The French Senate is also voting on the Greek bailout today.

We also saw Greek bonds explode overnight on the news that their bond swap deal is still under subscribed with just 2 days to go until the deadline:

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Greek officials were hopeful on Wednesday banks would eventually participate in a bond swap deal as targeted, a key part of a bailout aimed at rescuing the euro zone member from bankruptcy.

A Greek newspaper reported the take-up was 75 percent, well below a 90 percent target just two days before a Sept 9 deadline for expressing interest expires. Greek officials would not confirm the figure, saying negotiations were ongoing.

“Negotiations are still taking place and may take a while longer but we are optimistic the target will be met,” said a source close to the talks. “Roadshows are now taking place in Asia and America.”

Last month Greece turned the screws on investors, saying it may not go ahead with the debt swap if holders of less than 90 percent of the bonds take part in the scheme, which foresees an average 21 percent haircut on portfolios.

Struggling to meet the terms of its EU/IMF bailout, Greece is falling behind in reforms and privatizations, and is likely to miss its 2011 budget deficit target of 7.6 percent by at least a percentage point amid an austerity-induced recession.

Failure of the debt swap deal would threaten the entire second, 109 billion euro bailout to Greece, agreed in July on top of a 110 billion euro rescue in May 2010.

There were also some statements from the Finnish Prime Minister Jyrki Katainen who said his country may not contribute to a second Greek bailout package if demands for collateral in exchange for new loans aren’t met. He stated that this outcome “remains a possibility, it depends on the collateral issue”. Finland may be malleable on its demands, along with the Netherlands, however I have been hearing that Slovakia and Slovenia aren’t being so helpful. There is another meeting on Sept 16 to try to deal with this issue yet again.

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Finally we saw Italy push it latest austerity package changes through parliament:

Italy’s Senate approved Wednesday a multibillion-euro austerity plan, the first significant step in the government’s drive to press ahead with tough measures and stop the country from becoming the next victim of Europe’s sovereign-debt crisis.

Under pressure to put out a final version of the plan after weeks of revisions, Prime Minister Silvio Berlusconi’s coalition government presented to the upper house a plan that includes an increase in the value-added tax and raising the retirement age for women in the private sector, among other measures.

The latest version totals more than €50 billion in fiscal savings and extra tax revenue—greater than the €45.5 billion forecast under the original plan presented in August.

The plan is designed to balance the budget in 2013 and help the government bring down Italy’s enormous debt, which amounts to 120% of its gross domestic product, the second highest ratio in the euro zone after heavily indebted Greece

All of this news along with some greater than expected German Industrial output gave the markets a bit of relief on the back of some new found optimism that Europe can muddle through. Let us hope it can.

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