EU: Summit, Summa, Samarium

The top EU leaders are now dressing up for another countless crisis summit in Brussels. Over the next two days the elected representatives are going to try to agree on….on something. The single most important issue however – how the new bailout fund, EFSF is going to work – is most likely to be postponed, due to a slightly difference of opinion between Angela Merkel and Nicolas Sarkozy.

“It is hopeless in terms of what it reveals a lot about the policy process in the euro zone.”

Eurointelligence.com

Ms Christine LAGARDE, Managing Director of the International Monetary Fund, Mr Evangelos VENIZELOS, Greek Minister for Finance


I believe I agree with the analyst at www.eurointelligence.com when they characterize the already pronounced postponement of the EFSF issue as “hopeless but not serious.” There are too many loose threads in that ball, and it would probably not be safe to put it in play. But during the two-day extraordinary meeting is expected that the EU leaders comes up with something – at least some credible statements with a bit of substance.

On Thursday, France and Germany decided that they will not able to bridge their difference over the role of the EFSF by Sunday, and need more time to work out a deal.

It is not serious in the sense that there will be an agreement a few days later – in any case before the G20 summit, the Eurointelligence points out.

Adding: “But it is hopeless in terms of what it reveals a lot about the policy process in the euro zone.”

The postponement  is due to a combination of two factors: Nicolas Sarkozy’s diplomacy, and the German Bundestag’s insistence that it needs to give a mandate to the chancellor ahead of the summit.

Merkel would not have had a mandate to negotiate anything beyond the minimalist insurance solution that was recently under discussion.

She now has to crawl back to the Bundestag each time where she gets on a plane.

Merkel and Sarkozy will hold another bilateral summit on Saturday night, and will discuss the issue on Sunday. However no decisions will be taken.

In their joint communiqué, Thursday, they pretends that everything is fine.

But it did not persuade financial markets, which reacted with an increase in bond spreads.

Italy’s spread is now back at 4%, a level as we keep on point out is not consistent Italy’s sustained membership of the euro zone.

“From a market point of view, there is too much disappointment and disunity coming out of the EU right now. A further example has been the dispute between the IMF and the EU about Greece, as the IMF challenges the EU’s optimistic projections for Greek growth,” www.eorointelligence writes.

Mr François BAROIN, French Minister for Finance and Economic Affairs - Ms Elena SALGADO, Spanish Vice-President of the Government and Minister for Economic Affairs and Finance.

It also emerged that the bank recapitalization programme will fall in the too little, too late category of responses – now likely to be below €100 billion.

If you think that undercapitalized are the core of the problem, then this will not help. If you think that recapitalization will damage growth, a weak recapitalization may very well be better than a strong one –  but it will still be negative for growth.

When it comes to the EFSF, the debate is circling around the method of leveraging.

The Germans want to continue down the route the discussions had been going until Wednesday, by using a primary market insurance scheme that would allow the EFSF to insure up to €1 trillion in new debt issuance.

On the other side: The French say this is not sufficient, favoring a banking license for the EFSF.

Reuters reports that bond market experts are severely critical of the insurance schemes because it creates a two tier bond market.

If an Italian government bond was issued under this scheme, investors would no longer classify it as a sovereign bond, but as a structured product.

Another Summit on Wednesday

A follow-up summit is now scheduled for next Wednesday, according to  Frankfurter Allgemeine Zeitung.

Since there was no political agreement, chancellor Merkel was unable to deliver her speech in front of Bundestag today and to seek a negotiating mandate by the deputies as is now required after the constitutional court rulings and the legislation about the parliament’s involvement in EU decisions with budgetary implication.

So Merkel intends now to go to parliament in the beginning of next week to deliver what she could not bring to the deputies today.

Meanwhile, Wolfgang Schäuble have explicitly ruled out that the EFSF will be refinanced via the ECB as Sarkozy wants.

Damn! I would love to see some surprises for a change!

Green Light for More Money To Greece

The first thing to come out of the summit on Friday evening, was the statement about approval of the sixth trace of financial aid for Greece.

“Ministers of the euro area, meeting in Brussels on 21 October, agreed to endorse the disbursement of the sixth tranche of financial assistance to Greece. The disbursement is foreseen for the first half of November, following approval by the Board of International Monetary Fund (IMF),” the statement says.

The Eurogroup took the decision having examined the results of the fifth review of the economic adjustment programme for Greece, on the basis of a compliance report by the European Commission and a recent analysis of the sustainability of the Greek debt by the “Troika” (European Commission, IMF and European Central Bank).

The ministers also noted that the macroeconomic situation in Greece has become worse since the fourth review , but they welcomed Greece’s “substantial fiscal consolidation efforts”, especially the austerity package that the Greek parliament approved on 20 October.

Full text of the Eurogroup Communiqué,

The Eurogroup invites the Greek authorities to continue implementing structural reforms and their privatisation programme.

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