Europe: Critical Decisions and Dates

 

September 6: Spain and Italy are clinging to the Euro by an ECB-spun thread.  We don't yet know the conditions the ECB will demand in order to purchase bonds, and its possible they could be more than Spain and Italy could politically bear.  The market seems to have given Draghi the benefit of the doubt, but he will need to deliver acceptable details by the Sept ECB meeting, or the market will likely again call Europe's bluff.

What must Draghi address?

• The conditions that Spain and Italy will have to agree to for the ECB to purchase bonds
• Will acceptance by the EFSF/ESM program be sufficient?
• This would then require approval of all member countries, including Germany
• How much room for error do Spain and Italy have?  E.g., would Greece still get ECB purchases if the program applied to them today?

• How Draghi plans to deal with ECB seniority
• A simple waiver of seniority?
• What really happens in the case of a default (or PSI)?  Will the ECB be solvent if they have to take a haircut equal to the private sector?

• To what extent is the ECB willing to buy bonds?
• Draghi has stated, for example, that they will do whatever it takes, but no more.

September 12: The German Constitutional Court releases its opinion on the constitutionality of the ESM.  It is likely to be ruled constitutional, but if conditions are applied…well, we'll have to wait and see.  We likely already know the outcome, but the impact of anything other than an unqualified "Yes" makes this extremely important to watch.

End of September: The Troika will release its conclusion on whether to release the next bailout tranche to Greece.  Further measures by Greece to comply with the bailout conditions are a prerequisite to receiving more aid, but are not necessarily sufficient.

Other notable items may include:

• By Sept. 11: Details on a EU banking union.  As underwhelming as preliminary proposals from European leaders are, the bar is probably set pretty low.
• By end of September: Details of the Spanish banking stress tests.  However, these are a confidence-building measure and not an actual analysis, and as such, I have no confidence in their conclusions.
• By end of September: Moody's will have completed its review of Spain's rating.