The EU End Game: Deliver, Or Face The Punishment

The European markets are now zooming in on Brussels and the crucial top summit, starting tomorrow Thursday 24. Most market participants are not particularly optimistic, in fact, they’re preparing to punish the EU politicians if  they don’t deliver on they’re promises.

“It now seems unlikely that there will be a compromise at the summit.”

Gavan Nolan


Credit spreads opened wider this morning as traders woke up to higher oil prices and a Japan nuclear situation that is far from resolved.  But the main focus for European markets today, and probably for the rest of the week, is closer to home.

The price of Brent crude broke through $116  barrel in the early hours of this morning and remained above $115 throughout the day, as Colonel Gaddafi made his first speech since the air strikes began and the Libyan leader was defiant as ever, pledging that there will be no surrender to the international coalition.

President Obama announced Wednesday that Gaddafi may try to “hunker down”, raising the prospect of a protracted conflict that will curtail oil supply for an extended period.

But Foreign Secretary Hilary Clinton says, however, that Gaddafi’s camp have been sounding out other countries about a possible exile, making a swift end to his regime a possibility.

The tentative optimism around Japan faded today when workers were forced to evacuate the Fukushima nuclear plant. Smoke was seen coming out of the problematic no. 3 reactor, thereby stopping the repair work that had continued through two aftershocks this morning.

“The indirect effects of the accident are also damaging sentiment. Unsafe levels of iodine have been detected in the Tokyo water supply, and the US has become the first country to ban food imports from the area around Fukushima. Tepco has given back some of its gains from yesterday,” credit analyst Gavan Nolan at Markit writes in his daily Intraday Alert.

Zooming In

But the European markets are now zooming in on Brussels where the important top summit starts Thursday.

There is still plenty of loose ends to tie up; particularly around how the EFSF will reach its full lending capacity and the terms of Ireland’s bailout loans.

We saw Friday with the European bank stress details – no list of the banks involved, capital requirements not defined, no haircuts on sovereign debt held in banking books – how the authorities can disappoint investors.

“Next week’s crucial EU summit has to deliver on its promises if further punishment for the peripherals is to be avoided,” Nolan pointed out in last weeks summary.

Portuguese Trap

Portugal’s minority government faces a crucial vote Wednesday afternoon on its latest austerity programme.

The opposition have already said they will vote against, and if they follow through with their threat then it could trigger a general election.

“This would be an inopportune time for Portugal’s government to collapse, to say the least,” Nolan comments.

Adding: “The two-day EU summit starts tomorrow, and if Portugal’s governance is in disarray then its position will be weakened.”


“Many already expect the Iberian country to have little choice but to accept a bailout before its redemptions in April, and the latest bout of political instability won’t help its cause. Hopes that this summit would yield a “grand bargain” have been fading for some weeks now, and reports emerging today suggest that the pessimism was justified,” the Markit credit analyst writes.

Details of how the EFSF will reach its full EUR440 billion lending capacity will not be agreed at this summit, according to Reuters.

It is probable that domestic politics has had a deal of influence here, according to Nolan

“The government of Finland, one of the AAA-rated euro zone members, has refused to countenance raising its guarantees, no doubt influenced by vocal opposition from right-wing parties at home.”

Angela Merkel’s German government also has domestic considerations that could stay its hand.

Another crucial point that was expected to be resolved this week – Ireland’s bailout terms – could be left hanging. A German official was reported as saying that a deal was unlikely; the situation had not changed since the interim agreement earlier this month.

There is little doubt that Ireland’s 12.5% corporate tax rate is the bone of contention.

“It now seems unlikely that there will be a compromise at the summit. Peripheral spreads widened before recovering later in the afternoon.More volatility can be expected in the days ahead,” Gavan Nolan concludes.

See also:

The EU End Game: Regaining Control

The EU End Game: Decision Time

  • Markit iTraxx Europe S15 104bp (+0.5), Markit iTraxx Crossover S15 385bp (+2)
  • Markit iTraxx SovX Western Europe S5 174.5bp (0)
  • Markit iTraxx Senior Financials S15 149bp (+3), Markit iTraxx Subordinated Financials S15 265.5bp (+7)
  • Sovereigns – Greece 970bp (+7), Spain 219bp (+3), Portugal 531bp (+1), Italy 159bp (0), Ireland 610bp (-9)
  • Saudi Arabia 127bp (+2), Bahrain 335bp (-7)
  • Japan 105bp (+5)
  • Tokyo Electric Power Co – 270bp (+30)
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52 Comments

Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics

52 responses to “The EU End Game: Deliver, Or Face The Punishment

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