There have been two clear stories making the headlines early in the Asian trade, proving to have enough substance to sparkle a relief rally in the Euro, which triggered stops above 1.3280 and 1.3325 as market gains confidence the debt crisis may ease on a potential “Stability Pact” being discussed by Germany and France; hopes for a EUR 600 bln bailout for Italy added to the temporal optimism, which was later denied by another report carried by Dow Jones.
The risk on mode follows meetings over the weekend between German Chancellor Angela Merkel and French President Sarkozy, both rumored to be nearing a “stability pact” and more involvement from the ECB in shoring up the spreading of the European debt crisis.
Deeper fiscal integration may see its implementation feasible by early 2012, discarding any change on existing EU treaties as it would take too long. According to the Welt am Sontag newspaper, among the measures of the new Stability Pact, there would be a treaty stricter deficit rules and control rights for national budgets.
German Finance Minister Wolfgang Schaeuble said on Sunday they could secure these changes rather quick. "One can do that quickly," he told ARD television on a quote from Reuters, referring to changes to the Lisbon Treaty that Germany has been seeking to allow much tighter budget controls. "The goal is for the member states of the common currency to create their own Stability Union and to concentrate on that," Schaeuble said.
As reported by Marc Chandler, Global Head of Currency Strategy at BBH: "Many critics have argued that such a course will require tedious, laborious and protracted negotiations among seventeen countries and the investors were becoming increasingly impatient. However, the German-French initiative that is expected now to be formally put forward at the December 9 EU Summit, will advocate a different but not unprecedented approach."
The ECB should also increase its role on containing the Euro crisis by more bond buying. Expectations on the ECB acting more aggressively are key to see a more sustainable Euro rally. Welt am Sonntag wrote: "Based upon these measures, there should be a majority within the ECB for a stronger intervention in capital markets," Welt am Sonntag said. It quotes a central banker as saying: "If the politicians can agree to a comprehensive step, the ECB will jump in and help.”
Rumour and counter rumour on large Italy/IMF deal
Meanwhile, an article in La Stampa managed to animate even further the sense of risk appetite, after IMF officials were cited as proposing an EUR600bln bailout. “The money would give Italy’s Prime Minister Mario Monti 12 to 18 months to implement his reforms without having to refinance the country’s existing debt” reports Bloomberg.
However, the Euro slipped back below 1.3300 after Dow Jones reported that officials indicated that there have been no discussions within G7 of the reported large IMF package for Italy first cited by "La Stampa" newspaper.
Italian 10 year yields continue to trade at incredibly high levels above 7%, with a 10-year bond auction scheduled tomorrow, when it plans to offer up to EUR8bln. It will be interesting to see how the IMF is going to raise €600bn given that Lagarde only recently said they only have €285bn in emergency funds.
'Elite' bonds issuance an alternative to Euro bonds
In another rumour that popped up through mid Asian session, European newspaper Die Welt cited unnamed highly placed EU officials saying "the German government and five other Eurozone member states with a triple A credit rating are considering issuing bonds together."
"The paper said that the money raised by the bonds would finance the debts not only of the six AAA-rated countries — Germany, France, Finland, the Netherlands, Luxembourg and Austria — but also help provide financial assistance, under strict conditions, for Italy and Spain" the article added.
Political breakthrough in Belgium
There was an important political breakthrough in Belgium over the weekend too that should not be under estimaed. After an impasse that has laste more than one year and a half, a new government will be allowed to be formed in the next fews days, agreement predicated on a budget breakthrough. The increasing pressure on Belgium 10-y bond yields and its recent downgrade has undoubtely help to speed up the political stalemate.
"Belgium's 2012 budget will boost planned savings by 11.3 bln euros. It projects next year's budget deficit will be just below 3% (2.8%) and will deliver a balanced budget in 2015. The risks to the euro zone growth in general appear on the downside and this in turn risks deficit projections. In any event, the take away here is that end of Belgium's political paralysis comes in the nick of time for it to demonstrate its resolve to stay within the core, despite its high debt/GDP levels" Marc Chandler said.
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