We got one last chance to make it real, trade in these wings on some wheels…

Mint – Blain’s Morning Porridge September 24 2012

Another interesting week in prospect with few folk convinced about US recovery. Meanwhile we’ve got Italy auctions, Spain maintaining the fiction bono yields are sorted ahead of elections, the Greeks and the troika being particularly polite to each other – which I assume means the Bubbles are holding out for easier terms. Excellent… we’ve been here before, and I suspect we’ll be here many times more. All of it has the potential to wobble markets.

The market is swirling with comment and rumour. Has an acceptable Spain bailout already been agreed? How much more than €100bn might Spanish banks need – this week’s audit numbers are rumoured to be worse than expected and will show dramatic deterioration! Mario Monti is clearly talking his own book as he announces Italy Solvency Risks “appear to be over”.

It’s still all about politics, but Europe is proving far more resilient than I would have credited it for earlier this year. In fact.. I’m going to admit I’ve lost money on side bets I took on Greece finally defaulting, or Italy/Spain being forced to the bailout trough, by the end of the summer! Almost as surprising, my expectations Dutch voters would prove massively anti-European at the ballot box proved unfounded.

As said before, better news management and a redirected ECB, free of its slavish imitation of the Bundesbank, is effectively setting a more sustainable market tone. While Trichet was happy to beat failing countries with the troika stick, the new ECB is using the carrot of easier timetables.

Sure there are market doubts: Spain bailout, or can the Greeks and Troika find a “compromise” on the next series of cuts in return for some debt forgiveness? Or, as we highlighted last week; what will be done about the terminal weakness of European economies including Ireland?  Without growth, the crisis goes on and on and on.

But the big bet for markets is ultimately a very simple one: can the EU build a sufficiently solid support base for the Euro that absolutely ensures the weaker European states will pay? Can they create a European will and structure that effectively persuades the market Bonos, OATs,  and BTPs are full faith and credit of Europe – AKA Germany? If you believe so, then fill your boots with Euro debt .

Which is why Merkel and Hollande disagreeing over the shape of banking regulation is so important. Firstly any sign of disunity is a massive Euro sell signal. Secondly, Germany doesn’t want banking to become yet another ad hoc reactive plug in the dyke – they want solid effective institutions to police the new European Union.

In contrast, France wants to put up a new Euro edifice as quickly as possible to convince international markets Europe is saveable before the inevitable rot pulls it down as well. Yep… it’s that simple…

We’ve got European finance ministers – for instance the Belgian Chap Coeure - telling us the EU is changing, that the Draghi OMT programme ensures the future of “PIIS” bonds (notice their subtle dropping of Greece), and OMT ensures no more “elevated rates”, default risk or currency redenomination. Is he right? The politicians realise the key to success is convincing markets they are willing to save the Euro and the mechanisms are in place – have you noticed no one is talking about the now obsolete EFSF or ESM?

What we are seeing now is a “reconstruction” stage of the crisis. The Euro Elites have embraced the concept of closer union as the solution path for the Euro crisis. The Germans see this as a strict rule-based system forcing states to adhere to unbreakable fiscal rules and oversight. Do desperate politicians across the rest of the Eurozone see it the same way? I suspect not – the concept of a looser transfer union to cover long-term competitivity and productivity adjustment looks a more likely agenda.

Europe is rushing towards a fiscal transfer union through a “freed up” ECB, new infrastructure like ECB banking regulation, and the new treaties/pledges/agreements towards closer Union. Is it going to work? It’s all about politics.

Out of time..

BB

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