Welcome back to my live blog, which will be covering the euro-zone leaders’ crucial meeting today where they will attempt to reach a definitive agreement to tackle the bloc’s spiraling debt crisis and market movements. There are worries that a deal will not be agreed, despite the urgency of the situation. The euro-zone leaders need to reach a deal on a second Greek bailout, including agreement on how much Greek bondholders will have to write off in so-called haircuts. They also need to confirm final details of a deal to boost the euro zone’s rescue fund–the European Financial Stability Facility. Meanwhile, the EFSF needs to be ratified today by the German parliament and Italian policy makers wrestle to come up with a solution to its debt mountain which satisfies both the EU and, perhaps more importantly, the markets. The Italian Treasury paid higher yields Wednesday than a month ago to sell the planned €10.5 billion short-term debt, as markets remain tense over Italian political and economic prospects, and over the outcome of the European Union summit later in the day. The Treasury, which faces a further two debt sales this week, sold €8.5 billion in six-month Treasury bills and €2 billion of the September 2013-dated CTZ, a zero-coupon bond. It paid an average yield of 3.535% on the six-month T-bills, up from 3.071% previously. It paid a yield of 4.628%, up from 4.511%, on the CTZ. Demand was in line with previous auctions.
"The rising yields reflect increasing political uncertainty in Italy," said Tobias Blattner, director for economic research at Daiwa Capital Markets. "They also reflect uncertainty over tonight's summit, as hopes for a solution to the debt crisis seem now fading." Italy is at the forefront of euro-zone concerns with €1.9 trillion in debt, said Société Générale analysts. The country is facing simultaneous headwinds, including a cyclical slowdown which, in SocGen's view, will "almost certainly" lead to a recession in 2012 and 2013 and a structural loss of competitiveness, as well as an electoral system that prevents a clear-cut improvement in establishing economic policy.
"The rising yields reflect increasing political uncertainty in Italy," said Tobias Blattner, director for economic research at Daiwa Capital Markets. "They also reflect uncertainty over tonight's summit, as hopes for a solution to the debt crisis seem now fading." Italy is at the forefront of euro-zone concerns with €1.9 trillion in debt, said Société Générale analysts. The country is facing simultaneous headwinds, including a cyclical slowdown which, in SocGen's view, will "almost certainly" lead to a recession in 2012 and 2013 and a structural loss of competitiveness, as well as an electoral system that prevents a clear-cut improvement in establishing economic policy.
4 comments:
Good to see Italy is taking its obligation to come up with the austerity goods seriously.
Its letter to the European Union detailing exactly how it plans to bring its finances into line is “ready”, an EU source tells us. It just hasn’t exactly arrived yet. But it will. Before the summit.
Bear in mind that the European Council members arrive in Brussels at 3.15 p.m. GMT.
Someone should tell the postman.
When he returns from the summit, French President Nicolas Sarkozy is expected to go on TV and explain to the French public exactly what he's agreed to do with their sovereign guarantees.
In a rare TV appearance, Mr. Sarkozy will also have to explain why and how France will embark on further austerity measures. His government has already promised as much by pledging to stick to deficit reduction targets while acknowledging that their growth outlook is no longer credible.
Mr. Sarkozy will no doubt get a chance to practice his austerity talk today in Brussels: His euro zone peers will be keen to know how the French President intends to hang on to the country's triple-A rating, without which the euro zone's bailout mechanism would fall apart.
Here's the thing: expectations for what the EU summit can deliver are at rock bottom. The farcical back-and-forth on which countries want what on which terms, and which meetings are going ahead and which aren't, has left traders pretty disillusioned.
So it would take only a vaguely sensible post-summit announcement to give the euro a boost, assuming the Bundestag doesn't pull the rug from under the whole thing (very unlikely).
Right now, in early European trading, the euro is holding just above $1.39 against the dollar.
Morgan Stanley, which got forced out of a tactical positive bet on the euro only yesterday during volatile trading, now says it still reckons the common currency could head as high as $1.4060 once the summit concludes. That would be the highest level for the euro since early September.
Don't expect it to last, though, the bank says. Use that juicy high as a nice level to sell, it suggests.
A deal requiring private creditors to take a 50%-60% haircut on Greek debt could be perceived as a credit event, sparking downgrades by rating agencies. Banks have sold credit default swaps to insure investors against such credit events, and would be forced to sell equities or other assets to plug the financing gap. Such selling pressure could swell over the next days, German analysts from Wellenreiter-Invest warn.
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