Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

What to Look for Next Week in European Summits


Plus, bonus issues that need to be solved by early July.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

MINYANVILLE ORIGINAL Here is a complete breakdown -- or as complete as I can compile -- of what you can expect from European leaders at next week's summit with, some knowns and unknowns:

Friday, within the space of a few hours, we had a number of headlines from European including:
  • Germany's Bundesbank (and pretty much the 800-pound gorilla of the ECB) criticized this plan and said they would not accept such collateral.
  • Separately, French President Hollande and Italian PM Monti stated that they would unveil a 1% growth plan for Europe after their meeting in Rome. Their plan calls for as much as EU130 billion in stimulus.
  • Spain, meanwhile, may officially ask for bank aid, in the amount of the previously discussed EU100 billion. Currently, Spain would receive this aid from the European System of Financial Support ("ESFS") because the European Stability Mechanism ("ESM") is not up and running.
  • Spain's PM Rajoy refuted arguments that Spain would inflict losses on subordinate bank bondholders.
As of Friday, only four of 17 governments have ratified it and recent headlines from European finance ministers make the July 9 ratification date seem extremely optimistic. It seems to be setting up a situation where Spain, and anyone else requesting stimulus, will get funds from the EFSF until it runs dry and Spain's request would surely push it to its limit. Only when the ESFS is exhausted does it seem like Europe will hurry along the ESM. Also not addressed this week was whether or not the not-soon-to-be-ratified ESM would recieve "preferred creditor" status. While reassuring for an eventual ESM, such a move would further subordinate bondholders. Given these circumstance we can expect to see a push to leverage the EFSF. As before, it likely won't work, but there's no reason we couldn't see an "EFSF To Be Leveraged 3-4x" headline to buy more bonds.

Next Week

On June 28-29 we have the EU summit in Brussels. At the very least, the market is expecting the following:
  • Officials should come out with a plan for a banking union of sorts.
  • A euro-wide deposit guarantee scheme to stem the deposit flight we've seen from weak banks.
  • The banking union to attempt to stimulate cross-border lending by banks (whether or not that works is still up for discussion, but the attempt would be viewed as positive for the market.
The caveat to the above being that the plans are implemented fast to stem the bleeding that a number of assets, especially those of Spanish banks, have been suffering.

European leaders have been pushing for tighter eurowide regulation, especially Germany, whereas France and others are looking to shift the burden to the rich (witness Hollande's tax-the-rich scheme and transaction tax ideas). So the best we might see are some points being "met in the middle" by leaders at the summit.

And, in their voluminous free time over the two-day summit, participants have to squeeze in a few issues from the new government of Greece. From the Greek wish list expect to hear about:
  • Renegotiating the conditions for the bailout package they received earlier this year.
  • Abolishing the cuts to the minimum wage and pensions through 2014 while still keeping the asset sales in place.
  • Recapitalizating of the Agricultural Bank of Greece. (So far, Germany has flat rejected this proposal.)

Despite what is accomplished at the jam-packed two-day summit, many of the same participants will be facing another issue as early as July: Whether or not to directly recapitalize banks using ESM. To my understanding, the EFSF would not be able to fulfill this role, and it was also said early this week that the European Investment Bank ("EIM") can't either.

A push to recapitalize would coincide with a push to make sure the ESM is ratified in early July. We will also likely hear talk of the European Financial Stability Facility buying bonds in the secondary market or even primary market (at auctions), per its mandate.

If they get it all done, they certainly could relax during their famous six-week summer vacations.

Twitter: @MichaelSedacca

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Featured Videos