On Wednesday the German constitutional court, aka the KKK (Krimson Kardinals Of Karlsruhe [7], any association with other acronyms is purely accidental), will decide if Europe stays or goes. There is some possibility Karlsruhe may delay the September 12 decision even further, following a new complaint [8]by a Merkel conservative, Peter Gauweiler who said in a statement on Sunday the fund should not be ratified unless the ECB rowed back on its plans to make unlimited purchases of sovereign bonds, since that he said, posed a major risk to Germany's own national budget. The Constitutional court is expected to opine on this latest hurdle today or tomorrow at the latest. However we doubt it. So what does the binary outcome ahead of Wednesday look like? Here are some Wall Street pundits opining. Curiously, while the market is also pricing perfection as the outcome to this event, there may be gray skies forming. Via Bloomberg:
Bank of America Merrill Lynch
- Ruling poses more of a “binary risk” than other events this week, Ralf Preusser, head of European rates research, writes in client note published Sept. 7
- Two risks that are not priced in: 1) court okays injunction request pending changes to law that introduces ESM into German legislation; 2) court sends case to European Court of Justice
- Markets also not pricing in likely delays in countries activating ECB’s OMT support
- Sees value in buying Nov. 144/146 bund call spreads for 26 cents, for pay-out ratio of 7.7x
Morgan Stanley
- Still see 40% chance that court bans Germany from ratifying ESM treaty, Morgan Stanley’s Anselm Karitter says by phone, reiterating view outlined in Aug. 30 note by Elga Bartsch, chief European economist
Berenberg
- Ruling may well contain “unpleasant surprises,” as fact court is taking so long to decide on such an injunction suggests it has some doubts, Holger Schmieding, chief economist, says in client note
- Sees 20% risk that court will decide against allowing ESM to replace EFSF now; more likely that it will allow Germany to ratify ESM, while adding very restrictive interpretation to text
- Sees only an outside risk that court could reject ratification of fiscal pact; court may clarify what it already hinted at strongly in EFSF ruling, that euro bonds are illegal
Daiwa Capital Markets Europe
- While there’s risk of further postponement in judgment, most observers expect court to allow ESM to go ahead, Chris Scicluna, head of economic research, writes in client note
- Degree to which court “emasculates” ESM by requiring additional conditionality on its operations will be key
- If court were to postpone judgment for lengthy period, post-Draghi feel-good factor likely to dissipate swiftly
And, of course...