Update: Earlier today, when previewing today's EU Summit, we concluded that just one word summarizes best what to expect from today's EU summit: disappointment.
Sure enough, we were right because moments ago Reuters reported that today's talks have ended with no agreement on the recovery package as four "frugal" EU countries oppose grants, with the "Northern Camp" demanding that recovery aid be linked to the next EU long-term budget, an outcome that will lead to a furious reaction from Italy - and potentially another near collapse of the Eurozone - as the heavily-indebted Italy was hoping to get a blank check from Brussels due to the historic recession that has hit Italy due to the coronavirus. It no longer appears that that will happen:
- EU LEADERS' TALKS END WITH NO AGREEMENT ON RECOVERY PACKAGE
- FOUR FRUGAL EU COUNTRIES OPPOSE GRANTS, NORTHERN CAMP WANTS RECOVERY AID LINKED TO NEXT EU LONG-TERM BUDGET - DIPLOMATIC SOURCES
- EU LEADERS AGREE ON NEED FOR CORONAVIRUS RECOVERY SUPPORT, TASK EU COMMISSION TO ASSESS NEEDS, PROPOSE NEW BUDGET AND WAY TO FINANCE RECOVERY - DIPLOMATIC SOURCES
This was inferred from the earlier source reports which suggested they agreed on the need for COVID-19 recovery support and have tasked the commission to assess needs, propose a new budget and a way to finance recovery. The earlier reports noted four EU countries opposed grants, and the northern camp wanted recovery aid linked to the next long term budget. This suggested no progress has been made as we were hoping for an update on how the package would be funded, and the argument between grants and loans has been ongoing for a while.
The silver lining is that Germany's Merkel stated it is clear from talks that everyone says a recovery fund is needed and everyone agreed to work together; She added that "must expect higher contributions to the next EU budget from Germany.:
In other words, Europe at least agreed on the need for coronavirus recovery funding, but they tasked the EU Commission to evaluate the needs and propose a way to finance it.
That, as ForexLive's Adam Button notes, "is the EU's version of 'we've decided to study it'. The market doesn't want a study, it wants action but the differences and structure of the eurozone make it so difficult. The euro truly was a 21st century solution to 20th century problems. We're now in the era of debt monetization and European countries can't participate."
The EURUSD naturally tumbled on the news:
Some more details from a reporter on location:
**correction— mehreenkhn (@MehreenKhn) April 23, 2020
- 🇩🇪 Merkel said grants not in categoru is something she can agree, but still called for "huge" effort
Not sure which leaders have sent an SMS asking to speak again but this one could be ending mercifully soon #euco— mehreenkhn (@MehreenKhn) April 23, 2020
More as we get it, but absent a market shock we doubt the "frugal" EU nations will change their mind.
* * *
Now that the latest initial claims reports is in the history books, revealing that a record 26.5 million people have been let go in the past five years, which is over 10 times the prior worst five-week period in the last 50-plus years...
... the most important event today is the long-awaited European Council summit which is taking place via videoconference this afternoon, where as Jim Reid writes, the big question will be over how the idea of a European Recovery Fund is financed. Yesterday, Bloomberg News reported that the Commission would propose a €2 trillion plan that would in part use the bloc’s 7-year multi-annual budget with a €300bn recovery fund included, but also establish a new temporary financing mechanism that would raise up to €320bn. However, this could prove controversial given the issuance of joint debt, to which northern member states - most notably the Netherlands and Germany - are strongly reluctant.
Commenting on today's "make or break" event, Rabobank's Michael Every recaps the above, saying that "a temporary €300bn recovery fund is being discussed along with a €200bn recovery and resilience facility, €R50bn in repurposed cohesion funds, and two €200bn funds “to protect the EU’s internal markets”. And that appears to be it, even though somehow this is €2trn in some headlines."
Alas, as with everything European, there is nothing but chaos as the world looks to Europe for some comfort. As Every continues, Italy which yesterday announced that its fiscal deficit will be 10% of GDP in 2020 even though there is precious little stimulus taking place, and which will almost certainly be downgraded to junk as soon as Friday, is now willing to avoid the debt mutualiation issue and instead favour ultra-long maturity or perpetual bond issuance, and "one wonders how the Usual Suspects in northern Europe will feel about that compromise."
But the real kicker is the following: the total confusion over what Europe hopes to actually achieve:
I won’t allow myself to get sucked into the classic Euro game of mind-stultifying fudge, acronyms, and deck-chair rearranging. Instead, I will quote Bloomberg directly: “
The ‘roadmap’ EU Council President Charles Michel distributed to national delegations ahead of the video conference contained no details on the amount, the specific objectives, the time frame or the nature of the investment needed to get the bloc back on track. Leaders aren’t expected to reach a decision this week and a final package may not be ready for at least six months, according to a French official.”
SIX MONTHS?! And then action on a scale that looks completely out of kilter with the economic damage being wrought. Euro-committees are all very fine and good, and I am always told they work best when in a genuine crisis (or only in a crisis) – but where is The King when you need him? He appears to have left the building.
Meanwhile, as DB's Jim Reid continues, "if we saw a full agreement today that would be a surprise but progress and something that Italy can sign up to will be the key." At the same time, DB economists do expect an eventual agreement on a recovery fund, noting that "it would be a positive surprise if the important details were agreed today, since the question of burden sharing is politically complex and the ECB’s purchases are absorbing market pressure for now."
According to them, the things to watch out for are: the size, speed and structure of the fund, even though joint bonds are unlikely for obvious reasons due to the Northern states current lack of desire to go down that route.
We’ve also seen increasing speculation around grants recently, which could be the principle means of buying solidarity, but that would also lead to tough debates around the ratio of grants to loans within the Recovery Fund and eligibility for the
Finally, here is a summary primer courtesy of RanSquawk on what to expect today, even if the most accurate expectations out of the EU summit is the usual one: disappointment.
The EU27 are poised to sign off on the plans concocted by EZ finance ministers, and brainstorm on a long-term recovery plan. Leaders have signalled a general will for a larger coordinated fiscal response, albeit views seem to differ. Officials noted that the North fears that their financial positions will be contaminated by debt mutualisation in the future due to decisions taken by the South. The European Council is expected to discuss the size of a European Recovery Fund alongside other financing tools. The virtual meeting will be chaired by EU Council President Michel at 1400BST, although the lack of detailed proposals could see another impasse or delay in talks.
EU RECOVERY FUND: The Council President said the Fund should be established as soon as possible to kick-start economy once lockdown measures are eased, but officials note of a large divide between member states on the size and whether it should consist of only grants or solely loans. Consensus on a Recovery Fund this week has been heavily downplayed, with officials pointing to more clarity in June or July. In terms of the nuances, Spain is to propose a EUR 1.5tln recovery fund backed by perpetual bonds to finance the recovery of the worst-hit countries in grants and not loans, to avoid rising debt. France has backed the principals in Spain’s proposal but noted a physical meeting will be needed for a formal decision, potentially before Summer – President Macron previously said there is no choice but to set up a joint EUR 400bln recovery fund. Sources said the European Commission is reportedly seeking EUR 320bln in the market to finance the regional recovery, whilst later reports noted that the Commission is floating a EUR 2.2tln plan for economic recovery.
EUROGROUP FALLOUT: At the Eurogroup meeting, Finance Ministers agreed on a EUR 540bln rescue package which consists of:
- ESM CREDIT LINE (up to 2% of Euro Area GDP): This will be immediately available for member states with “light” conditionality. The size could be up to USD 240bln should all countries tap the maximum available. This also opens the door to Outright Monetary Transactions (OMT) by the ECB, which allows the Central Bank to purchase unlimited debt from the worst-hit regions, albeit some analysts have suggested that the OMT programme has already been made redundant by the ECB's new PEPP.
- FIRMING EIB ACTIVITIES (up to 1.6% of Euro Area GDP): The European Investment Bank could support EUR 200bln of company financings, with emphasis on SMEs.
- SHORT-TIME WORK SCHEME (0.8% of Euro Area GDP): The EUR 100bln scheme was drafted to aid protect jobs and workers hit by the pandemic in the form of loans on “favourable” terms.
CORONABOND: The common debt issuances pursued namely by Spain and Italy was not included in the Eurogroup’s draft document after experiencing pushback by several larger members, vehemently from Austria, Germany and Netherlands. However, Italy seems to be erring towards a compromise on the issue. Italian PM Conte, at a Senate hearing on Tuesday, signalled open-mindedness towards the ESM credit line and an alternative fund as a substitute to Eurobonds. Desks note that this should reduce tail risks for a roadblock.
ITALY’S DILEMMA: PM Conte set a high bar for success in negotiations for a post-virus response as domestic pressure builds at the epicentre of the European outbreak. Desks note that the PM will need a win to confine the rising Eurosceptics whilst fending off opposition parties waiting to muster support from any failures. Despite Conte’s more recent sanguine tone regarding a Coronabond compromise, participants believe the PM could be tempted to walk away from the table, having had battled for weeks on a Euro-wide debt instrument. Meanwhile, domestic pushback could arise from a compromise of just ESM lines – potentially paving a way for a change in government. It’s also worth noting that S&P will be reviewing Italy’s sovereign debt on Friday; the agency will be eyeing the outcome of negotiations. Credit Suisse believes that the survival of the Euro could be at risk if EU leaders fail to understand the difficultly in Italy’s economical and political landscapes.