| Mixed bag - overall assessment of last week is rather mixed |
| 12.12.11 18:27 | |
|
In focus Our overall assessment of last week is rather mixed. On the positive side, there is more money for the IMF and the ECB has moved a long way to support bank funding through heavy deleveraging. But the fundamental causes of the crisis remain largely unaddressed and the defaults of the current crisis management mechanisms have not receded. Euro area governments remain in the state of limited liability partnership whereby they refuse to make a stronger commitment towards supporting the Euro area as a whole. As a result, there has been little progress on the sovereign nor the banking aspects of the crisis: - There is no fiscal integration, nor coordination of fiscal policies at the Euro area level. Rather, there is an attempt at fixing budgetary policy for years, thus preventing Euro area countries from using any policy tool to manage the business cycle. In addition, the timeline is such that this will not even provide an incentive in the short term to countries such as France which need to increase their fiscal adjustment (France's debt sustainability fact sheet). Overall, this sets the stage for no counter-cyclical policy management and at the same time does not resolve the short term issues facing the Euro area. Any suspicion that implementation at the national level will not be credible runs the risk of undermining this framework. - The risk of debt restructuring for Euro area countries remains. That has implications for sovereign and bank bonds: if the "Greek style PSI" has been removed from the permanent crisis resolution mechanism, restructuring "IMF style" remains together with collective action clauses which are meant to ease restructuring procedures. As a result, Euro area sovereign debt remains a risky asset, as the Greek case suggested. This continues to be an impediment for external investors to invest in sovereign debt and this will not contribute to a restoration of confidence in Euro area banks, in our view. - The link between the bank and the sovereign crisis is left untouched: there is no strong decision on bank reorganisation across the Euro area (according to our credit analysts, EBA stress test results fall short of the necessary capital requirements), and some states may consider that the long term liquidity provisions from the ECB for banks is hidden QE. If that is the case, it strengthens the link between banks and sovereigns, whilst the sovereign issues remain largely unaddressed. This is unlikely, in our view, to contribute towards restoring confidence in banks. If that is not the case, then those who expected some QE from the ECB will likely be disappointed. - Finally, the EU summit decisions are unlikely to proceed swiftly. Due to the row with the UK, Euro area countries decided to move with a separate intergovernmental Treaty. In principle, this should preclude Euro area countries from using any EU institutions for implementing what was decided at the Summit. Given the European Commission and the Court of Justice are meant to be heavily involved, this incompatibility needs to be resolved. source: Bank of America ML |
| < Prev | Next > |
|---|