At the euro summit today there was essentially nothing what was really surprising. We wonder what markets are so excited about.

The long way to Eurobonds

  As we stated in a previous post, Germany still requires the following steps, before transfers among euro members in form of Eurobonds or a banking union can happen: Step 1) Euro Plus Pact for more competitiveness Step 2) Fiscal Compact Step 3) ESM (Permanent loans among members, seniority status) Step 4) Political union with common economic policy Step 5) Fiscal union including a central authority to approve national budgets Step 6) Eurobonds, banking union, transfers among members To make things clear, we split step 3, the ESM, into 2 parts, distinguishing between 3a) ESM state loans (Permanent loans among member states, seniority) and 3b) ESM bank loans/recapitalization (Permanent loans to European banks, seniority) Reuters called the summit helpful to achieve a fiscal union, because now France will accept step 2, the Fiscal Compact. Before the ESM is ratified by all parliaments, member states (not banks !) obtain loans from the EFSF. In absence of the Fiscal Compact, the Troika usually supervises if the loans are correctly used. Essentially we are still at step 1 and have a work-around for step 2 (Troika) and a work-around for step 3 (EFSF). Spain will now quickly obtain loans from the EFSF and inject it into its banks respecting state aid rules. This time the Troika will not be involved. The EFSF funds and loans will be later transferred to the ESM, because the EFSF is only a temporary vehicle. Therefore one day funds like the Spanish banking aids, will be moved as loans to Spain from the EFSF to the ESM. As opposed to the ESM, the EFSF does not have a seniority status.  When the EFSF funds/loans will be finally part of the ESM, then certain ESM loans like the former EFSF loans to Spain will not have seniority status. They will be still loans to Spain, and NOT loans to the Spanish banks, even when the supervisor is in place, as the FT wrongly claims.  In order to transfer the loans to the Spanish state into loans to Spanish banks, they would need a new ESM loan, which is available only with seniority status.  

What was "new" ?

1) Direct banking recapitalization via the ESM under supervision of the ECB. However it had been expected already since September 2011. Supervision is possible before 2013, hence no direct banking recapitalization before 2013. The banking recapitalizations are ESM loans and not transfers, there is no common deposit insurance like the FDIC. 2) No troika supervision for the EFSF loans to Spain. Since Spain has implemented a quite severe austerity, this is nothing really new. 3) Measures for growth, which were widely expected and not extraordinarily strong. Here an overview: [table id=3 /]  

Next steps in Germany after the summit

Merkel continues her stance that Germany provides help only based on sharp controls (like the Fiscal Compact) and under "give and take". According to Dow Jones Europe, Merkel's "take" on the summit is a Tobin Tax, if the ESM is allowed to finance banks directly. Strangely the German parliament has decided about an ESM law, in which direct loans to banks are not foreseen. The (left-wing) Süddeutsche Zeitung calls it a violation of the ESM contract, before it even has been ratified by the parliament. Probably the discussion in the Bundestag is just a farce and a new law needs to be written and discussed. This will take some weeks or months. Then the German constitutional court will take some more weeks or months to examine it. The German president will not sign the law before. Reuters talks about the possibility that the court will order a German referendum, the first since the Hitler's enabling act in 1933. The former employer organization president and now the leader of the German anti-ESM movement had named the ESM a "financial enabling act". For us and for the German finance minister only the fiscal union or a political union, will require a referendum, but not the ESM. Given all these hassles we wonder, what all this party was about. Full story here Are you the author? Previous post See more for 2.) Bailouts ESM Eurobonds Next post
Tags: austerity,Bank-Recapitalization,Constitutional Court,ECB,EFSF,ESM,Eurobonds,Eurozone,Finland,Fiscal Compact,Fiscal Union,Hollande,Merkel,Political Union,Referendum,Spain,zone