More Details Slowly Emerge
Monday’s meeting of Eurozone finance ministers again stretched beyond midnight, but the headlines produced no major surprises. A few more details on Spain’s bailout emerged, particularly related to the size and the timescales involved – but the details will not be formally set in stone until a second meeting of finance ministers on July 20. So far, the ambition is to release EUR 30 bn to the Spanish government by the end of July via the EFSF. It seems to us that this represents only the first tranche of funds of a larger package given that sums of up to EUR 100 bn had been spoken about previously. Spain is to get 15 years to repay the loan. It was also confirmed that Spain will be granted an extra year to achieve its deficit reduction targets a proposal that had leaked onto the newswires earlier on Monday. Overall however, investors were left with the impression that politicians are not progressing with a sufficient sense of urgency (and the euro slipped steadily lower as the session wore on). For example, technical discussions about how the ESM might conduct direct bank recapitalization will not begin until September, and a decision on a bailout of Cyprus has also been postponed until then. Ireland too will have to wait until then for concrete proposals on how Europe plans to help deal with the sovereign legacy of the domestic banking crisis. As expected, the ECB formally accepted the role of acting as agent to the EFSF in the secondary bond markets using only EFSF funds (and not ECB money) to do so. Although, EU Commissioner Rehn acknowledged this represented a further step towards eventual bond purchases by the EFSF, it is clear this feature of the bailout fund is note ready to be activated imminently. For a start, we note that a formal request will first need to be made by the sovereign in question which will then need to be vetted at the European level. Conditionality offered in return for assistance will then need to be agreed. The ECB must also investigate and satisfy itself that the secondary bond market in question has become dysfunctional. Lastly, the EFSF will need to raise the finances necessary to intervene. This is not a process that is likely to conclude in just a few days. Today, the euro will likely take its cue from the reaction of Spanish bonds, although a German constitutional court hearing on the legality of the ESM is also likely to be a focus of attention once proceedings get underway around 0800 GMT. It is unclear at this stage how soon a verdict can be expected, although Germany’s president has refused to sign the ESM into law until the Court gives its seal of approval. Until then, the ESM cannot become operational, which means the EFSF will remain Europe’s only bailout facility for some time to come.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank