August 4, 2012

September will be Crunch Time for Europe


"September will undoubtedly be the crunch time," one senior euro zone policymaker said. "In nearly 20 years of dealing with EU issues, I've never known a state of affairs like we are in now," one euro zone diplomat said this week. "It really is a very, very difficult fix and it's far from certain that we'll be able to find the right way out of it."

As eurocrats take their mandatory vacations for a job well done, Europe will enter hibernation mode, until September which according to Reuters "is shaping up as a "make-or-break" month as policymakers run desperately short of options to save the common currency."

Reuters explains why September will also be known as the popcorn month:
In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.

On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy - or what do if one or both were to topple.

Since the crisis erupted in January 2010, the euro zone has had to rescue relative minnows in Greece, Ireland and Portugal as they lost the ability to fund their budget deficits and debt obligations by borrowing commercially at affordable rates.

Now two much larger economies are in the firing line and policymakers must consider ever more radical solutions.
In Reuters' own words, the life raft is about to go pop:
The euro zone does not seem to have enough cash in the current setup to deal with a scenario of Spain and Italy needing a rescue, and a sense of doom is growing among some policymakers. Fighting the crisis, said the euro zone diplomat, is like trying to keep a life raft above water.

"For two years we've been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak," the diplomat said. "But now the leak has got so big that we can't pump air into the raft quickly enough to keep it afloat."

Compounding the problems, Greece is far behind with reforms to improve its finances and economy so it may need more time, more money and a debt reduction from euro zone governments.

But Greece is, once again, just the beginning.
Sept. 12 is a crucial date in the European diary. On that day the German Constitutional Court is scheduled to rule on whether a treaty establishing the euro zone's permanent bailout fund, the 500 billion euro European Stability Mechanism (ESM), is compatible with the German constitution.

A positive ruling is vital, because Germany is the biggest funder of the ESM, and the euro zone would be powerless to protect Spain or Italy without the ESM.

On the same day, parliamentary elections are held in the Netherlands where popular opposition to spending any more money on bailing out spendthrift euro zone governments is strong. The Dutch vote may complicate talks on a revised second bailout for Greece, which also has to be agreed in September.
All this, and much more, is finally coming to a head, as the time for can kicking is running out.
A full timeline of the incoming events, courtesy of Deutsche Bank is listed below:

August:
  • 13 August: Italy auction. Bills
  • 14 August: Italy auction. Bonds
  • 14 August: Euro area Q2 GDP flash estimate, from Eurostat.
  • Mid-August: French Constitutional Court/Fiscal Compact. In Mid-August the French Constitutional Court is due to rule whether  the Fiscal Compact, which euro area countries are due to endorse by the start of 2013, needs to be ratified into the French Constitution. If so, a joint vote by the French Assembly would be required. Signals are that this would happen in September if required. See accompanying article on France in this issue of Focus Europe.
  • 16 August: Spain auction. Bonds
  • 20 August: Greek bond redemption. Greece is due to repay EUR3.1bn of GGBs. Following the PSI, these would be GGBs owned  by the ECB and EIB. While agreement on how to reconfigure the second loan programme is unlikely before September, it is unlikely the EU will hold-out from paying funds to Greece to repay the ECB/EIB. In a consolidated sense, the official sector’s exposure to Greece remains the same, but the creditor changes (to the EFSF). Alternatively, Greece could issue T-bills and the  Greek banks could absorb them with the assistance of ELA from the Greek central bank.
  • 21 August: Spain auction. Bills
  • 28 August: Spain auction. Bills
  • 28 August: Italy auction. Bonds
  • 29 August: Italy auction. Bills
  • 30 August: Italy auction. Bonds
  • End-August: DBRS rating on Spain/Ireland. By the end of August, the DBRS ratings agency is due to have concluded its review  of Spanish and Irish sovereign ratings.
September:
  • September: Moody’s due to conclude review of Spanish sovereign rating. Logically Moody's should wait until there is clarity on  direct recap before making a decision on Spain’s rating. Since governments have not made progress fleshing out a direct recapitalisation facility — indeed, have created some ambiguity as to whether it will be non-recourse — there is a distinct risk that Moody's, in another move to be “ahead of the curve”, decides to downgrade Spain within the next 3 months. Moody’s currently rates Spain Baa3, the lowest investment grade rating.
  • September: Detailed bottom-up Spanish bank stress tests due for publication.
  • 6 September: Spain auction. Bonds
  • 6 September: ECB Governing Council meeting. If we are right about the outcome of the 2 August ECB meeting (dominated by “quantity” measures), we suspect that revisions to staff forecasts for growth and inflation are likely to be a basis for a 25bp rate  cut.
  • 11 September: Greece auction. Bills
  • 12 September: German Constitutional Court ESM ruling. The German Constitutional Court is to rule on the complaints lodged  against the ESM and fiscal compact. The chances of the ESM being vetoed are low. However, the Court might again strengthen the German Parliament’s prerogatives as regards future European integration (see Focus Germany, 20 July). Germany is the last approval needed for the ESM to come into effect. Then the first instalment of the capital has to be paid by the ESM members  within 15 days of the ESM treaty entering into force. There are three other countries where Constitutional Court queries are outstanding — France, Austria and Ireland. France’s Constitutional Court will be deciding by mid-August. Neither Austria (which  may take another 3-6 months) nor Ireland are large enough to hold back the ESM — the ESM will come into force when countries representing 90% of the subscribed capital have approved it. Both Germany and France have an effective veto power in that case.
  • 12 September: Dutch Election. In April, the VVD/CDA minority government failed when Geert Wilders' PVV party withdrew its  support amid negotiations for the 2013 austerity budget. A crisis was averted when three smaller parties came forward to give support to a budget, but an early election was unavoidable. Domestic austerity and European crisis issues will likely play  important roles in the election. Compared to the configuration of parliament at the October 2010 election, the latest opinion polls (Maurice de Hond) show PM Rutte's VVD liberal party vying with the Socialist Party for the dominant party position. Both would  gain 31 seats in the 150 seat parliament on the latest polls. This is an unchanged position for VVD, but a doubling of SP seats. SP are gaining at the expense of all other parties except VVD and neo-liberal D66. This may reflect a backlash against the  austerity for 2013 which has broad party political support. SP have also taken a stance against euro rescue initiatives, voting against the ESM alongside the PVV and extracting a pledge from Dutch FinMin De Jager that parliament will vote on any future  direct bank recapitalisation disbursements. Given the typical distribution of the vote among several parties, the questions are  what coalition emerges from this election, how long it takes to form a government and what policies will it support? Markets in particular will be watching the ramifications for domestic fiscal policy (the 2013 Budget is a week after the election) and euro  rescue initiatives.
  • 12 September: Italy auction. Bills
  • 13-14 September: G20 Finance Ministers and Central Bankers meeting. In Mexico.
  • 13 September: Italy auction. Bonds
  • 14 September: ECOFIN meeting. This is very likely the finance ministers meeting when adjustments to Greece's second loan programme will be considered. The remaining EUR23bn recapitalisation of the Greek banks is due to complete by the end of September, assuming a positive review of the loan programme. This is also when finance ministers should have their first discussion on the proposals for a common bank supervisory regime under the ECB. Any delays, with knock-on delays for a direct bank recapitalisation mechanism, will disappoint the market. Options for a reconsideration of Ireland’s legacy bank bailout policies may also be discussed (decision not due until October ECOFIN meeting).
  • 15 September: Eurogroup meeting. Coinciding
  • 18 September: Greece auction. Bills
  • 18 September: Spain auction. Bills
  • 20 September: Spain auction. Bonds
  • 25 September: Spain auction. Bills
  • 25 September: Italy auction. Bonds
  • 26 September: Italy auction. Bills
  • 27 September: Italy auction. Bonds
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