By now everyone is well aware that the payback for the absolute zero that was August in terms of newsflow and events, the first quiet August in three years, will be September, which as we and others dubbed, will be "Crunchtime" for Europe. And with September now just days away, and with the transitionary Jackson Hole forum virtually assured to be the latest dud, with Draghi surprisingly bowing out at the last minute (even as Buba's Jens Weidmann is still set to attend), and with Bernanke guaranteed to do nothing more than just jawbone some more without real action, the time to refresh on what to expect over the next 30 days has come, courtesy of this annotated calendar from SocGen.
Thanks to ECB President Draghi, markets have this year been able to enjoy a more normal summer break without constant glances at the newswires. As European politicians made a slow return this week, the question now is whether the ECB and policymakers can provide more substance to a framework that credibly can deal with upcoming threats and allow us to start contemplating lifeafter the crisis.
The first half of September is likely to be decisive in terms of markets getting some long-awaited answers on how various hotspots will be dealt with, in particular Greece, Spain and Italy. While the mood is relatively positive currently, we fear that markets are underestimating the risks associated with conditionality and continued weak real economic data. The ECB meeting on 6 September may disappoint in delivering further details, given reports that the ECB may await the decision by the German Constitutional Court before presenting its plans for bond buying.
29 August – Chancellor Merkel and PM Monti to meet: PM Monti is under pressure to deliver some concessions from his European partners – also in view of the Italian parliamentary elections in April next year which risks seeing the return of less reform-committed politicians.
SG view: We expect the meeting to focus on the possibility of Italy seeking support from EFSF/ESM/ECB later this year.
6 September – Chancellor Merkel and PM Rajoy to meet: Depending on the progress with determining modalities over the conditionality for EFSF/ESM/ECB support (presented the same day), there could be some news from Spain regarding how it sees the need for moresupport and resistance to more conditionality.
6 September – ECB meeting: This key event is expected to spell out the concrete details and modalities of ECB’s new non-standard measures, in particular its secondary market interventions to ease “convertibility” risk on government bonds and financial market fragmentation. However, recent reports suggest that a delay is possible, awaiting the German constitutional court decision on 12 September.
1) ECB to buy government bonds again. The ECB has already expressed its readiness to take on more credit risk, under strict conditionality, via a new/revamped SMP programme, focusing on shorter term maturities. The ECB will work in cooperation with the EFSF/ESM (expected to act on the primary market), which will agree a Memorandum of Understanding with individual countries. A one-to-one match by the ECB, would raise the European firewalls to around €800bn which could cover, in extremis, the financing needs of both Spain and Italy over three years.
2) No pre-commitment on amounts. The ECB is unlikely to announce specific amounts, but has already suggested that they will be “sufficient” (Bundesbank also conveyed the view that intervention could potentially be unlimited, but in any case sufficient). We expect full transparency on amounts and destinations only ex-post.
3) No explicit yield caps. We see small chances of any yield caps which would imply the possibility for unlimited interventions, which in turn could conflict with the primary objective of price stability (although the supply of bonds is presumably limited).
4) Some adjustment to ECB’s seniority. The ECB has promised to address problems related to its senior status. The easiest way would be to accept pari passu with private investors, but also some formula of guarantees from EFSF/ESM could be perceived.
5) Other non-standard measures are also possible to deal with fragmented markets, including non-recourse repos, easing of collateral or reserve ratio requirements, a new LTRO to banks and/or extension of ECB’s covered bond purchase programme.
6) Another rate cut is expected. Most indicators continue to signal weakening demand, also in the core countries, suggesting that monetary policy will need ease further. We do not however expect to see the deposit rate below zero.
12 September – German constitutional court: The German constitutional court is expected to deliver its decision on whether to issue an injunction to delay the establishment of the permanent rescue fund ESM.
SG view: The Court will not rule against the ESM allowing it to become operational, but any conditions would have implications on further integration and debate in Germany.
12 September – Dutch elections: Early election in September was the price tag of the five-party austerity budget for 2013. While we expect austerity to remain in place in Holland, there is a shift to the left, with the Socialist Party expected to double its votes on oppositionto both domestic austerity and the fiscal compact.
SG view: The Dutch election has the potential to cause renewed uncertainty in Europe – even if the winning parties may soften its stance, the fragmentation of Dutch politics suggest that there will be difficulties in finding a stable coalition necessary to ratify important decisions such as on the ESM, the fiscal compact and further steps towards a banking union.
12 September – FOMC meeting: Slower momentum in consumer spending over the course of Q2 as well as weakening in forward-looking surveys has led to FOMC staff revising down forecast in the near term.
SG view: With growth expected to be below potential also in the medium term, we maintain our view of additional QE measures being announced in mid-September.
15 September – Eurogroup meeting: Provided more clarity in early September, we expect Spain to be ready to decide relatively soon whether to apply for bond purchase support from EFSF/ESM and the ECB.
SG view: While most attention currently is on the ECB’s and EFSF/ESM’s efforts to lower bond yields, additional initiatives should not be ruled out. The main aim would be to keep bond markets open for private investors, which in addition would help reducing the measures by EFSF/ESM.
End-September – Commissions report on single European bank supervision: As announced by President Draghi, the Commission is advanced in its preparation of a new mandate for bank supervision by the ECB.
SG view: We expect the ECB to be given a core set of powers to oversee all banks in the euro area while delegating day-to-day supervision to national authorities which could be implemented as soon as early 2013.
End-September – Cyprus: A deal for the fifth euro area country to seek external help could be struck by end-September. Discussions are complicated by the communist-led government which is opposed to “indiscriminate, across-the-board measures that lead to recession”. A bail-out could exceed the €10bn estimated, due to Cyprus’ public finances being in a worse shape than initially expected, according to the Troika. Bank recapitalisation will be at the centre of any bail-out, given losses inflected by developments in Greece.
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So to summarize, SocGen sees the possibility of any game changers as low, or said otherwise, Europe will do everything in its power to avoid making any important decisions this time around either.