The post meeting optimism from the late June EU Summit has all but evaporated as once again different political interpretations get put on the outcomes of what was supposedly agreed at the meeting. The apparent ambushing of German Chancellor Angela Merkel at the Brussels summit by Messrs Hollande, Rajoy and Monti appears to have been anything but, as markets also worry about the timeframes for implementation on bank recapitalisations. As usual the main concerns surround the absence of any political consensus amongst EU leaders as the northern half of Europe once again, mindful of voter disquiet about fiscal transfers, once again talk about conditionality with respect to the release of bailout funds.
Reported comments last week from the Finnish finance minister that the country would leave the Eurozone rather than pay other countries debts has certainly served to raise the stakes, and this, along with concerns about a weak European economy has once again seen Spanish and Italian bond yields pushing back up to dangerous pre-summit levels.
Last week’s ECB meeting also left investors feeling flat on the basis that expectations had been slightly raised that the ECB would be slightly more radical, in the terms of what the bank actually delivered. Cutting the deposit rate to zero is all very well, but the fact is the reason banks are putting money overnight is more to do with capital preservation, and bolstering balance sheets, than a reluctance to lend.
The refusal of the bank to restart its SMP program due to concerns about a bond run and further risks to its balance sheet, is starting to leave Europe short of policy options to contain a further deterioration in the crisis.
Today’s European finance ministers meeting is expected to follow on from the measures agreed at the summit and look at agreeing interim terms for the Spanish bank bailout and how the EFSF/ESM would be expected to finance any bank recapitalisations. Once again Germany and its allies like Finland and the Netherlands are pushing for strict conditionality in the terms of any bailout.