EU Summit fails to provide breakthrough but speculation on Wednesday's outcome remains high
Written by Barclays Capital Global Research Monday, 24 October 2011 11:20
"That said, while speculation on what is likely to be announced on Wednesday at the next EU summit is running high in the press."
In contrast to broad-based expectations from politicians, analysts and market participants alike, Sunday's long-awaited EU Summit on how better to address the euro area's fiscal and financial crisis did not even yield a partial breakthrough.
Instead, European leaders announced another summit to be held on Wednesday 26 October with a view to concluding the respective discussions by then. The delay seems to be driven mostly by the request from German Chancellor A Merkel to be allowed sufficient time to address and consult the German Bundestag before major decisions are made on 26 October.
Today's summit conclusions dealt mostly with governance issues surrounding the European Semester and the structural policy agenda of the Europe 2020 strategy. On the pressing issues of providing a comprehensive policy response to the fiscal and financial sector problems in growing parts of the euro area, the official summit press statement remained largely silent and pointed to the summit on Wednesday.
That said, while speculation on what is likely to be announced on Wednesday at the next EU summit is running high in the press, rather than take our readers through a detailed commentary on those speculations, we prefer to focus on what we believe are the few important takeaway points from the Sunday summit and related bilateral meetings:
- It appears clear from remarks made by leading European politicians at the summit meetings and from related media reports that bank recapitalisation has been agreed for the systemically important European banks. Details of which banks would have to raise which amount of capital to which capital threshold and by which deadline have yet to be announced. Similarly, it is not clear whether or not it would be left to the banks' discretion what kind of capital should be raised and whether the EFSF would provide contingent capital should certain banks and their respective sovereigns be considered too weak to raise the capital themselves.
- Limited EU Treaty changes are now apparently being considered, possibly with a view to enhancing the fiscal and economic surveillance and governance framework of the EU. Wednesday's summit will thus again host all 27 EU member countries, according to several press reports.
- There are some indications that bank funding problems (e.g. in the senior unsecured funding markets) could also be addressed at the next summit meeting, as several media outlets have been reporting that bank bond guarantee schemes were likely to be reinitiated. In principle, this would be good news as bank funding markets currently are clearly impaired.
However, those guarantee schemes would not be supported by the EFSF, according to press reports. If confirmed, the latter would be of limited value, as sovereign guarantees issued by Spain or Italy for their respective banks might be of limited economic value to the banks with regard to the possible reduction of marginal funding costs.
On Greece, there seems agreement that euro area creditor countries such as Germany, France and the Netherlands have agreed to push for larger debt relief for Greece, as the Troika report suggests more substantial than initially anticipated funding needs for Greece over the coming years. Reportedly, Germany and the Netherlands were pushing for debt relief of at least 50-60 percent, possibly through a full-fledged debt restructuring rather than a voluntary PSI exercise. France, however, would be more in favor of a voluntary contribution to debt relief by the private sector through a modified PSI.
However, according to several newspaper reports (e.g., FT, Handelsblatt), international banks were resisting any debt relief that would imply NPV losses of more than 40 percent. In any event, it seems clear by now that any agreement on a second financial rescue package for Greece is likely to come with substantially higher debt relief than initially envisaged.
However, this would certainly imply additional bank recapitalisation costs, as Greek banks would be in need of support and it is still unclear what the ECB's position on such a more bold move on the outstanding Greek sovereign debt would be.
The Above is an excerpt from a Global Research note from Barclays Capital
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