September is going to be another one of those ‘do or die’ months for Europe and events begin this Thursday with the monthly meeting of the ECB executive council. At that meeting Mario Draghi is expected to reveal exactly what the ECB will be doing next in order to ensure monetary policy is hampered by the on-going crisis. But this is Europe so nothing ever runs smoothly.
German central bank chief Jens Weidmann’s reported threat to resign has piled pressure on European Central Bank President Mario Draghi to assuage his opposition to a new bond-buying plan without tying it up in so many knots it is rendered ineffective.
A Bundesbank spokesman declined to comment on Friday on a report in the mass circulation Bild newspaper that Weidmann, who has stressed his opposition to the strategy, had considered resigning several times in recent weeks but had been dissuaded by the German government.
Draghi is skipping this weekend’s Jackson Hole policymakers’ retreat to try to forge agreement. The Italian will have little time to celebrate his 65th birthday on Monday as he tries to seal a deal before a September 6 ECB policy meeting.
The ECB is preparing to ease painful borrowing costs in Spain and Italy, in the teeth of Bundesbank opposition, to buy the euro zone governments time to negotiate legal and political hurdles to a longer-term response to the euro zone crisis.
All eyes are now on Thursday’s meeting to see who has won the internal struggle and to see whether Mr Wiedmann will follows his counterparts Axel Weber and Juergen Stark who previously resigned over emergency action by the ECB. The fact that Mr Draghi had to cancel his visit to Jackson hole suggests the plan is not complete and there is a significant risk of downside disappointment. Personally I think we are going to see an announcement on the re-ignition of the SMP with a target on short term periphery debt, but only under the previously announced agreement that nations must first apply for emergency programs.
September 12th is date when the German constitutional court is set to decide on the legality of the ESM and, given what is now happening to the EFSF, it can’t come quickly enough for Europe.
Investors sent a warning shot to eurozone leaders that they are not out of the woods yet when they shunned the European Financial Stability Facility’s latest bond issue, just six weeks after the eurozone’s rescue fund priced its largest syndicated deal.
A EUR3bn 10-year ended up being undersubscribed, a far cry from the EUR6bn five-year sold in July that attracted EUR8bn of orders. Uncertainty over the costs of potential sovereign bail-outs and scale and shape of slated sovereign bond market intervention prompted investors to scale back their exposure on EFSF’s latest issue.
“The firewall that the official sector is building is underpinned by the belief that rescue vehicles can go to market and issue in great size,” said Sohail Malik, senior portfolio manager for ECM’s special situations team, an asset manager with assets under management in excess of USD9bn.
“But, in reality, the only European issuer that can now come to market and get away real bumper-sized issues is Germany,” he added.
EFSF’s recent successes in the bond markets reflect the comfort that Germany’s EUR211bn guarantee engenders, said Malik.
However, the German pool is quickly starting to run out, he said. Investors are now paying closer attention to the fact that with EUR152bn of EFSF issuance since its inception, 72% of the German guarantee has been used up.
And it isn’t just the EFSF who appear to be having issues selling paper. There is now growing evidence that the Spanish banking system is sufferring from an accelerating bank run. In order to meet these outflows Spanish banks have begun to sell down their holdings of Spanish paper with €9.3bn sold off in July.
Spain is beginning to lose the support of its banks as last-resort buyers of government debt, with lenders selling out of their holdings at the fastest pace in more than two years in July, ratcheting up pressure on the European Central Bank to step in and put an end to the country’s burgeoning debt crisis.
The sales are a blow to Madrid, which was increasingly reliant on domestic banks to buy its debt after an exodus of foreign investors. Domestic lenders, under political pressure to support the sovereign, used cheap loans from the ECB to buy an extra EUR87bn of debt between December 2011 and March this year.
As you can see from above the number of issues that the ECB is pushing against continues to grow. While the ECB attempts to muster the political will to put together yet another round of unconventional action the real economy continues to struggle. On top of last week’ PMI data that points to an accelerating decline in forward orders for new work, Eurostat released eurozone unemployment data on Friday which shows that unemployment remains extremely high across the zone.
Full report below.