EU summit to examine Spain, Greece and banking union - UPDATE
By María Gómez
Thu 18 Oct 2012
LONDON (SHARECAST) - Investors will be watching the two-day European Summit that starts Thursday afternoon in Brussels where leaders are expected to discuss several topics such as the bailout for Spain, the situation in Greece and the banking union although only this last item is officially on the agenda.
Despite the enormous importance of the issues at stake, and as is often the case, market expectations are low ahead of this meeting of the heads of state of the 27 member countries. It’s no wonder as CNBC did the math and counted no less than 22 summits -since the crisis in Greece began to intensify in 2009- and that EU leaders have already met up four times this year alone.
Along these same lines, Credit Suisse analysts explain that market sentiment on such issues as a direct recapitalisation of European banks by the ESM permanent bailout fund or the creation of the banking union will not be resolved this week. “We expect this statement to be similar to the one they gave last June. There won’t be any decisions made on mechanisms to better control individual nation’s budgets or on assistance to problematic countries. Those are decisions that will be undertaken much later,” they say.
SPAIN: AN IMMINENT… OR NOT-SO-IMMINENT BAILOUT:
Spain continues to avoid requesting that the European Central Bank (ECB) activate its OMT debt purchasing programme since it would be considered to be a bailout. In fact, Credit Suisse doubts that a call for help will come anytime soon and a weekend report from Reuters suggested it won’t be made until November. That despite the non-stop flow of rumours this week about how Spain will request the bailout “this weekend”, “next week” or “next month”.
In a similar vein, Barclays suggested last Monday that no request will be made by the central government until after regional elections in Galicia on October 21st (regional elections are also being held this Sunday in the Basque region of Spain). In this context, the broker recommended keeping an eye on the Spanish bond auctions this week, especially after the recent downgrade of the country's debt by S&P. Tuesday’s bill sale went off without a hitch as financing costs decreased but today’s long-term bond auction is expected to be a better indicator.
GREECE: THE NEVER-ENDING STORY:
Greek Prime Minister Antonis Samaras said last weekend that an agreement would be reached with the Troika (representatives of the ECB, International Monetary Fund and European Commission) on the necessary spending cuts to comply with bailout requirements before the start of the summit. However, things didn’t go as planned and no agreement has been reached. That said, German Chancellor Angela Merkel did promise her Parliament this morning that Samaras would be providing an “interim report” on its negotiations with the Troika.
Should the report reach their desks leaders would discuss three main topics according to Credit Suisse: the payment of the next tranche of the bailout, the extension of the programme and the sustainability of the country’s debt. “We think all decisions will be delayed”, these experts add.
BANKING UNION - UK WOULD VETO AND GERMANY SHOWS OPPOSITION:
Last week’s Ecofin meeting showed a clear lack of agreement as only 11 out of 27 EU finance and economic ministers approved the financial transactions tax and the situation on the banking union is expected to be little different.
First off, ECB President Mario Draghi already admitted over the weekend that the single supervisor of the European banking sector would probably not be operative until 2014, ruling out hopes for it starting operations next year.
Furthermore, the experts at Link Securities remind us that Germany is opposed to the new supervisor encompassing all the banks. “This country doesn’t want to allow the ECB to monitor medium-sized or small banks and we can only assume that is because it wants to avoid some unpleasant surprises. Germany only forced its biggest banks to take the stress tests, conveniently leaving the smaller regional banks on the sidelines that are the institutions with self-evident liquidity problems.”
These analysts also note that the UK has already threatened to veto the measure because it recognises “an obvious threat for business in the City”.
Finally, Merkel was relatively clear in today’s “hints” as she insisted on “quality before speed” in the creation of the banking supervisor.
As far as the official schedule, EU members are expected to begin arriving today at the meeting at 15:15 London time with the first working session scheduled to last from 16:45-19:00. Some time after the official dinner - expected to end at 21:00 - the President of the European Council Herman Van Rompuy and the head of the European Commission José Manuel Barroso will hold a joint press conference.
Coinciding with the beginning of the summit, the protests organised by Greece’s top labour unions have already begun in Athens with local media reporting that even small stores that opened in the last strike have shut their doors.
On Friday, the working session will start at 09:00 and last until noon. After 12:00, Van Rompuy and Barroso will hold another briefing, while other the EU heads of state are also expected to have individual press conferences.