July 23, 2012
Last week saw two important decisions in Germany in terms of euro crisis management: i) The Constitutional Court announced it will deliver its ruling on the ESM and fiscal compact on Sept 12. ii) Parliament, in a heated debate over the general role of banks, approved the EUR 100 bn bailout for Spanish banks which allowed FM Schäuble to agree – within the Eurogroup – to the MoU with Spain and the respective EFSF loan. The decision on the Spanish banking bailout is a welcome first step to break the negative link between bank and sovereign debt. The EUR 30 bn pre-funded tranche provides a credible backstop over the summer before the final quantified request and the subsequent decisions on restructuring are taken in September. Thus, the European autumn will become hotter than the (German) summer: A bailout programme for Cyprus, possible renegotiation of the Greek and Irish programmes, clarification of the Spanish banks’ recap needs (with risks to the upside), and above all the German Constitutional Court ruling and Dutch elections, both scheduled for September 12 and both fraught with some unpleasant risk for the final outcome (in the Netherlands, pro-European parties may fail to muster a workable majority). Finally, the European Commission has to submit its proposal for a pan-European supervisory mechanism by September. Given all these factors (and more to come?), the euro area is set for a packed agenda with highly controversial topics to negotiate and decide on – expect a lot of political noise and market volatility!
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