A long hot weekend dito summer
Yesterday we had triple whammy : 28 Spanish banks dramatically downgraded & Moodys threatening to cut the Spanish sovereign to junk ; then came the news that Monte dei Paschi will be bailed by the Italian government through means of so-called Tremonti bonds. And finally the presentation of Herman Van Rompuy's 7 page road map towards a "real" monetary union 10 years from now, immediately countered by Germany. And then we don't mention the fact that Cyprus is no5 on the emergency rescue line, with the ECB even no longer accepting it's sovereign paper as collateral.
But we like to focus on the road map of Herman Van Rompuy (in close collaboration with Junker, Draghi and Barroso). Without questioning the best intentions, there are however some remarks to be made. The road map primarily focuses on the following issues : common banking and supervision, deposit insurance and the hot potato of an (un)conditional move towards joint issued euro-bonds.
1) The banking union - referred to as integrated financial framework - would mean setting up an single EU banking supervisor for which the ECB would be considered to do the job in line with art. 127(6) of the Lisbon Treaty. Barosso indicated that most of this required legislation could be rounded up near the end of this year. Broad deposit guarantees would require a solid financial backstopn - dixit the 7 pager - and this means that the 500 bio ESM could/might support the the insurance guarantees and a potential fund for shutting failing banks.
But here already Jens Weideman's comments make clear that core Europe is suspicious about the proposal : "It makes little sense to single out the banking sector when talking about debt mutualization. It's important a banking union doesn't lead to back-door passing of euro-bonds"
2) On the budgetary front and more convergence of national policies (more supra-national power) : "Steps (careful now !!) towards the introduction of joint and several sovereign liabilities could be considered as long as a robust framework of budgetary discipline and competitiveness is in place to avoid moral hazard and foster responsibility......shared bills and common pay-down efforts are among the options...options include for example the pooling of some short term funding instruments on a limited and conditional basis and the gradual roll-over into a redemption fund"
So nothing really new here in view of some scenarios which have circulated over the past couple of weeks, which we already commented upon and of which the odds are not really immediately favorable when looking at Germany's stance on the matter. But that's what we call the game of chicken and it will be played out over the next 2 days. Correction, the next 4 days because when it comes to Monti, he is willing to go all the way until Monday morning, putting his job as Italian PM on the line.
And also here we have some question marks. On the one hand, a more successful union requires more centralized power and abdication of national power on economic/budgetary policy. Now when looking at the motives of the players - France, Italy and Germany included - it seems that none of them are ready, willing and able to comply with this change in philosophy. The growth pact for example is a clear result of the recent Hollande domestic electoral campaign. Monti can't return home empty handed because otherwise he will loose Silvio's backing in the government. So basically for all it is just a matter of "how far are you willing to go to loose your face without being politically destroyed on the domestic front ?"
Finally on the matter of timing and perception. Now here I think it's again politics underestimating the power and characteristics of Mr Market. Van Rompuy yesterday said that the summit needs to give the go ahead to forge detailed proposals by December. An interim report could be presented in October as the EU works on a specific and time-bound road map towards a genuine economic and monetary union. All fair and square but in the mean time July-September is knocking on the door. And this summit's outcome - minimum or maximum - is betting on Mr Market being benign in its perception and granting the road map the benefit of the doubt. That in itself is already a risky gamble to take on. In addition, the vultures back in London are sharpening their claws and can't wait to enter the play garden of illiquidity. And if the summer of 2011 is any guide on this, this can create quite some volatility, havoc and damage.