First 2012 EU Summit Convenes
The European Union opens its first summit of 2012 on Monday. Although no one has billed it as the meeting which could determine the fate of the euro, in our view there is very little room for complacency as buoyant markets could turn on the first sight of slip-ups. Fitch’s downgrades of five Eurozone nations on Friday was another warning that more needed to be done. Over the weekend, press reports have surfaced on German plans for greater surveillance over Greece’s taxation and fiscal affairs. The fact that such proposals are even under discussion indicates the European Union and other participants in Greece’s adjustment programme are extremely wary of the country’s ability to bring debt down to sustainable levels, and so far the IMF’s demand that the 120% of GDP figure be reached remains nonnegotiable. The associated surrender of sovereign for Greece in the discussed plans will almost certainly be a big source of contention and could potentially derail upcoming talks on funding for the second bailout. In the immediate future though, the PSI negotiation are expected to conclude over the coming days, with final details over the coupon on the new bonds set to be negotiated. Markets still appear optimistic on a positive conclusion for the Eurozone’s current issues, but we believe that the supposed return to bull-markets is somewhat unjustified at this stage. If anything, the appearance of ‘content’ markets, in additional to better than expected economic figures, have given the impression that the economic crisis is passing, and governments would be under less pressure to negotiate through much-needed adjustment. In our view, this is a very dangerous assumption to make and fundamentally-driven investors are unlikely to conclude the Eurozone has passed the worst of its economic problems. The supply of credit from the ECB may have succeeded in ring-fencing the banking sector, but regaining economic competitiveness comes from policies beyond the ECB’s control, and the governments in driving seats do not appear to share the urgency encouraged by both markets and central banks. On Monday, Eurozone confidence surveys and German CPI is out. The US will release core PCE numbers – a figure rising in importance after the Fed’s adoption of an inflation target.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank