Eurozone Summit: 7 things we learnt

2nd July 2012

The Summit Deal

In essence this hung on the fact that there would be a new Euro area banking supervisory authority under the auspices of the European Central Bank. However this is just a plan now which has a timetable of the end of 2012. In a crisis where the Euro authorities have been continually tardy in their response this does not inspire confidence as it is likely that bickering and arguing will delay any real progress on this front into 2013 and possibly well into it. This is assuming they agree in the end.

What About The European Stability Mechanism?

It may seem a trivial detail to politicians and officials but it is a fact that the European Stability Mechanism does not actually exist yet. When it does its planned firepower of 500 billion Euros is starting to look a little more like a water-pistol than a bazooka. In fact it is safe to assume that its predecessor the European Financial Stability Facility (EFSF) will run on to provide another 200 billion Euros or so. Even so that does not look remotely like enough.

If we return to the plan from the summit for the ESM to "recapitalize banks directly" then this clashes with another part of the plan. For this lending is planned not to increase that nations national debt. But if we assume that equity capital will be injected into banks who will then take the losses that are likely to happen? This is the catch with claiming that it is free money! The nations providing the funds have to take the hit if no-one else does. So the taxpayers of the nations supporting the ESM will find a rather unpleasant can has been kicked into their future.

What About The Nations Which Have Been Bailed Out?

If it turns out that the plan is to provide a bailout for Spanish banks which does not place a burden on the Spanish national debt then what about Greece and particularly Ireland. Greece had an increase in its national debt of around 25% of its Gross Domestic Product due to its banking sector and Ireland one of 40%. You might argue that because of the severity of her crisis this has not been material for Greece but Ireland is quite different. Her general government debt of 108% of GDP at the end of 2011 would look very different with 40% subtracted. Now care is needed as due to her large number of what are in effect non-domiciled companies Gross National Product is at least as important for Ireland as GDP and it is lower ( in 2011 GNP was 80% of GDP). But the principle remains.

So we see another issue open for debate and I note that The Irish Taiosearch Enda Kenny already seems to be claiming victory. Perhaps this contributed to the longest dated Irish government bond rallying just over five points to 93.95 on Friday! But if we look at its yield which is now 6.29% then it is very similar to Spain's ten-year bond yield. All in it together?

Actually if you consider that Ireland has already made more of an adjustment in terms of austerity than Spain you could make a case that her bond yields should be lower. Also if we look at their economic trajectories Ireland also looks on a better path,for now anyway. And her housing market has made a more substantial adjustment as have her banks.

What about the economy in the Euro area?

Whatever happens going forwards it is clear that if the economic evidence we have collected is accurate the second quarter of 2012 was grim for the Euro area. The purchasing managers surveys indicated an overall fall in GDP of over 0.5% with even previously relatively strong countries such as France weakening.

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