It seems that yesterday was ‘peak optimism’ for Europe and now we are on the downward leg. It is becoming very clear that whatever the deal is now is all that it is going to be, and that is if it can even get off the ground. This was nicely summed up in a statement overnight by the Austrian finance minister:
Austria needs to ensure it retains its triple-A rating and needed to take into consideration what it could afford, she said, adding that there was no risk at the moment for Austria’s rating. However, triple-A countries such as Germany, the Netherlands, Austria and Finland have signaled that they can’t imagine paying out much more new money, Fekter said.
On top of that, we saw Merkel make statements that Germany was not in support of a draft summit document that suggested that EU Ministers would push for the ECB to continue purchasing sovereign debt. So once again Europe has hit the limits of its dual incompatibilities and now seems to be struggling to deliver on the 3 point plan. The meeting of the 27 nation finance ministers that was to take place before Wednesday’s EU summit has been cancelled. This actually isn’t that bad given that none of those minister’s were capable of actual enacting decisions without their leaders anyway, but it demonstrate yet again just how clumsily this process is being managed.
The 3 parts of the new plan (EFSF, private sector write-downs, bank re-capitalisations) are tightly coupled and the major piece that need to be decided first is how much of a “voluntary” write-down can be taken on Greek debt before it considered a credit event. 60% seems to be the number that the European leaders are aiming for, yet I note that ZeroHedge has post quoting Barclays that this number is not acceptable:
In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts
As far as I can tell the Germany has been pushing this number and seems to have little regard for the possible CDS fallout. France and the ECB on the other hand seem to be extremely concerned about it. Obviously these plans were always going to have to be weighed up against private creditors accepting a deal and the rating agencies accepting the flow-on effects without downgrading sovereign participants, but it now seems that the plan is unravelling slowly, or at least reaching a point where nothing more can be added.
We now have the added weight of a decision by the Bundestag and, as I have repeated a number of times, we are still to hear the opinions of a number of the more hard-line AAA countries such as Austria and The Netherlands. This being the case I fear the plan is inadequate to meet the expectations that it is a “comprehensive” enough to head off further European economic trouble, so unless we see some “surprises” from Wednesday’s summit I get the feeling that European leaders are approaching the point of failure to meet the task they set themselves.
As I mentioned yesterday I am watching Italy as it seems to be imploding under the pressure. That continued overnight as the Italian Prime Minister struggled to convince his coalition party leader to back his plans to raise retirement age to 67. According to the Wall street Journal a compromise of some sort has now been reached but it is yet to be seen whether a “compromise” is acceptable to the rest of Europe. Greece has been budgeting itself into financial oblivion, yet the Italians seem happy to play Europe against itself and continue to do so.
Given that Italy is the new centre of European distress it will be very interesting to see how the summit is going to handle Berlosconi who seems to have almost lost control of his country at a time when strong leadership is vital. Italy has 600 billion euros worth of bonds to issue over the next three years to refinance maturing debt, given the ECB is already stalling at additional purchases with the backing of the Germans, you have seriously got to question whether Europe has the ability to get make it through.