EU mountaineers fail summit attempt

andres del risco

Someone said to me last night that “there is no such thing as hopeless situations, just hopeless people in situations”. The great and the good of the European political class have done it again and, after having the table set for them by an ECB seemingly greedy for balance sheet risk, they’ve come to nothing. The leaders have failed to agree to change the EU treaty so as to guarantee tighter fiscal control over EU members and instead we will see a watered-down agreement launched with great fanfare and very little spine.

It seems that David Cameron was the main stumbling block in negotiations for bigger concessions for the UK financial industry. Some commentators have suggested that this means the UK is dead to Europe and that our influence in shaping the continent in the future will be on a similar line to that of Malta or Latvia. Cameron however has done nothing more than what other EU leaders have done throughout the crisis; obfuscate for regional differences. Blaming him is unfair, the whole show is a farce.

Some good news has come of this summit; the IMF has managed to increase its funding by $200bn however, the main items that needed a decision on its funding; the European Financial Stability Fund and the European Stability Mechanism were left by the wayside. Negotiations will be picked up in couple of hours’ time and a decision is needed by Sunday night or all hell will break loose.

It was all looking great when Mario Draghi was speaking from his podium at the ECB after they decided to cut rates by 25bps. That was always going to happen, the key has always been the press conference. The ECB extended the LTRO program and banks can now borrow for up to 3 years from the ECB as opposed to 13 months previously. As we said in yesterday’s morning update this should allow banks’ balance sheets to become stronger (as they transfer risk to the ECB) and bring inter-bank funding back to a sensible level. The ECB also eased collateral rules so banks can use other assets to obtain funding. They used to have to submit AAA debt but now it can be almost anything (bonds, blue-chip equities, maybe even art).

These are both bullish but the rattle lower yesterday afternoon has come from another comment from Draghi that “he didn’t signal more bond purchases last week” and therefore we may not see further support for sovereigns. The new injection of IMF cash is not solely for the Eurozone (it must be used globally) but I wonder how much of it will end up around the Mediterranean. A summit judgement is inappropriate at the moment given it is still going on but much like many dons urged me, they “must try harder”.

Outside of Brussels we have seen the ratings agency, Moody’s downgrade the debt of BNP Paribas, Societe Generale and Credit Agricole, stating their “creditworthiness was being hurt by the fragile operating environment for European banks”.

Needless to say the day’s trade will be dominated by rumour and counter-rumour from Europe and we would advise all clients that, if they see a price that fits their budgets, to execute as Lord knows where this is going. Hope is an ineffective hedge.

Indicative Rates Sell Buy
GBPEUR 1.1720 1.1748
GBPUSD 1.5621 1.5645
EURUSD 1.3310 1.3334
GBPJPY 121.32 121.59
GBPAUD 1.5464 1.5491
GBPNZD 2.0349 2.0379
GBPCAD 1.5987 1.6017
NZDUSD 0.7658 0.7677
GBPZAR 12.88 12.93
USDZAR 8.2457 8.2802
GBPPLN 5.2830 5.3139
EURJPY 103.42 103.75

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