For the past two years the emphasis of the Eurozone’s Sovereign Debt crisis has been on the word ‘debt’ rather than ‘Sovereign’. It is increasingly obvious, however, that the overall of size of the Eurozone’s debt would probably not be the cause of a prolonged crisis if there was a more integrated system of fiscal governance. 

The fact that the Eurozone comprises of various sovereigns is thus EMU’s greatest obstacle.  Last week’s EU summit thus moved in the right direction in setting up guidelines through which national budgets could be policed. If the summit was a failure it is because there was a lack of confirmed policy initiatives. 

This is now translating into news that various states are unwilling to sign up to a deal which could potentially lead to a reduction in their sovereignty before there is more detail available.  In summary the summit has clearly failed to bring the reassurances that the markets had hoped for. 

It is against this backdrop that Italy hopes to auction up to EUR 3 bln of a 5 yr issue this morning.  Spain yesterday saw strong demand for its bill auction.  Decent demand for Italy today will likely translate into some short-covering pressure for the EUR. 

However, even a good auction will not lift concerns that Italy could struggle to get through next year’s heavy supply calendar. The Debt crisis has many complicated facets but ultimately these all melt down into whether or not investors are willing to fund budget deficits. Politicians still have their work cut out if they are to persuade investors that there is value in the debt of the Eurozone’s fiscally weak nations.  Tuesday’s low in EUR/USD at 1.3007.
 

source: Rabobank