Complete Summary Of What To Expect From Europe This Week

Tyler Durden's picture

While the short answer is "nothing", for those who wish to sound sophisticated in high society or while being interviewed on TV, here is the full breakdown of what to expect from Europe as we head into the latest European "end all, be all....forget all" summit this Friday, as well as the ECB's announcement on Thursday where consensus is for the adoption of dramatic monetary slash and burn practices. In summary from Bank of America: "Overall, because these meetings could fall short of making more concrete steps towards closer integration, they are unlikely to deliver more than a short term rally for markets, in our view, assuming communication is focused on delivering points for integration. Against this backdrop, we are concerned that markets may be somewhat disappointed though expectations may not be very high." Then again, disappointing is the new black, which also happens to be the new Christmas rally.

Firs, here is the definitive summary to keep through Friday, then to be promptly discarded:

Next, here is BofA's summary of the key European events toward the end of the week:

ECB 8th Dec meeting and around: from liquidity to bond purchases

There are three options the markets appear to be expecting: interest rates, bank funding and support to bond markets. We think the ECB meeting will focus on two sets of decisions only: interest rates and banking support, which could disappoint. Whereas interest rates decisions are necessarily discussed during a monthly ECB governing Council, liquidity operations and associated  collateral requirements may be decided outside of the interest rate meeting.

  • We expect interest rates to be cut by 25bp at this meeting, on the back of revised projections that would potentially include a recession or very low growth at least. We expect inflation projections to be shaved as well. This will likely open the door to further rate cuts and we are projecting rates to go down to 0.50% by the February meeting, in 25bp increment. As a risk, we see an increasing risk of a 50bp cut.
  • We expect an extension of the long-term liquidity operations as well as a relaxation of collateral requirements along the lines of the 2008/09 ECB actions to “restore bank funding so that they can proceed with their lending role”
  • We do not expect a strong announcement of full fledged QE with a nominal value target as was the case for the UK and the US. However, ahead of the EU Council and on the back of the Eurogroup (which the ECB President usually attends) there could be some hints at stepping up the SMP if necessary, in order to “restore transmission mechanisms of monetary policy” (see ECB QE piece). That said, provided EU Heads of State reach an agreement on and enhanced budgetary  framework at the 9 December meeting, the ECB could increase significantly its SMP, with a view of providing stronger support to the sovereign bond markets. In  our view, repetitive weekly purchase of about EUR20bn would send a strong supportive signal.

EU 9th December heads of state meeting

The agenda for this meeting bears a lot of anticipation but we are concerned it might fail to meet expectations, along the lines we described in the introduction. There are three key issues to be debated: strengthened fiscal framework, six-pack and governance. Financial markets expect fiscal centralisation at minimum, steps towards integration and Eurobonds, as a concrete expression of Euro area governments to the union. We believe there should be an agreement on fiscal  centralisation, but only a rather vague agreement on proceeding with Eurobonds in the future.

Euro area authorities have to deliver swift budgetary procedure reforms suggesting some form of integration while not necessarily requiring Treaty changes that need extensive national ratification procedures. These are incompatible objectives. Integration requires transfers of sovereignty and therefore important Treaty changes. Given the current economic school of thought across the Euro area, we think an agreement will be achieved on a minimum common factor, which will fall short of such federalist progress. We believe it is only in the future and after several years of progressive steps that a Eurobond could come into force. Decisions are likely to focus on:

  • More power to the European Commission for supervising national budgets. The Commission should be put in a position where it can deliver an assessment over all Euro area countries’ budgets, ahead of presentations to national parliaments. The Council, for opposing a Commission’s decision will have to vote with qualified majority. As well, some countries would like an ultimate sanction through the European Court of Justice in case of noncompliance with the Commission recommendations. This whole process would require minimum Treaty changes. However, they could disappoint markets through their lack of breadth.
  • There will also be some discussion on including structural reforms in the surveillance procedure, the so-called six-pack package, which again is unlikely to trigger a sharp market reaction, in our view, as structural reforms do address the Euro growth problem but in the medium term only
  • More concrete steps towards fiscal integration and a Eurobond are unlikely in our view for the moment. At most, we should get some talks about the above procedures paving the way for enhanced cooperation and maybe Eurobond down the road, but over the longer term and not as immediate response. This could  disappoint markets as it fails to provide concrete elements about a long term end-game vision.

Overall, because these meetings could fall short of making more concrete steps towards closer integration, they are unlikely to deliver more than a short term rally for markets, in our view, assuming communication is focused on delivering points for integration. Against this backdrop, we are concerned that markets may be somewhat disappointed though expectations may not be very high.