Draghi calls for urgent implementation of EFSF

Markets, which opened in the red on Friday, turned to mixed performance after ECB President Mario Draghi's speech at the European Banking Congress in Frankfurt, where the Italian called for a quick implementation of the EFSF decisions. 

Mario Draghi, who assumed the position of ECB president on 1 November, urged EU officials on Friday to step up the launch of the European rescue fund. “We should not be waiting any longer” stressed Draghi, who thinks the fund should have been made fully operational a long time ago and that further delays might have adverse consequences for the Eurozone financial stability.

The ECB President emphasized that a slowdown is expected in the activity of the majority of advanced economies and that “downside risks to the economic outlook have increased, and the weaker degree of activity will moderate price, cost and wage pressures.”

The ECB continued its Spanish and Italian bond purchases today, which is probably the reason for the fall of the EU countries' risk premiums from record highs they reached yesterday. The spread between the 10-year Spanish and German bonds decreased to 450 basis points from 520 while the Italian/ German spread dropped to 495.

The Eurostoxx 50 Index increased 0.06%, while the German DAX Index fell 0.25% and the French CAC 40 dropped 0.04%. In the UK. In currency markets, the dollar came off from recent highs on early European session. EUR/USD has bounced up from 1.3445 on early Asian session, reaching two-day highs at 1.3550.

The ecPulse.com analysis team consider it a short-lived recovery as “investors are not confident enough that the current political changes in Greece and Italy will help in solving the debt inferno.”

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New governments, new hopes, same problems

Markets are on their way to finish the week with optimism after the formation of a new government headed by Papademus in Greece and following the approval by the Italian Senate of a key budget bill, that if also approved by the Chamber of Deputies, it should lead to the resignation of Silvio Berlusconi as Prime Minister. Despite political changes, economic and political uncertainty remains high and continues to be an important driver of world markets. Europe remains on the center of stage, as structural problems continue.

Italy takes center stage

Markets managed to trim losses at the end of the week but tension and worries are still the rule. Market panic came after the Italian 10-year bond yield rose above 7%, rate that many suggest as key level and also a level that if holds, could make the fiscal situation in Italy unmanageable, as it could lose access to the debt market. As the week came to an end, bond yield pulled back below 7%, on the back of the Senate approval of key measures and amid speculations that Mario Monti, could be the next PM of a unity government. The bill approved in the Senate includes debt-reduction measures in order to increase market credibility. Reforms include €60B in spending cuts and tax hikes, sale of assets, liberalization of local services and a pension reform; it does not include changes in labor laws.

If the package is approved in the lower house, Berlusconi should resign and so far, the most likely scenario but not certain, is that Mario Monti will replace him. Monti is an economist an a former EU commissioner, that was named a life senator by Italian President, Giorgio Napolitano on Thursday. The President will have to name the next PM. Monti has experience in global finances and investors so far have received the prospects of him becoming PM with optimism, also Italian political and business leaders supported his possible nomination. If the formation of a new government fails, the President would have to call early elections, a scenario that some members of Berlusconi’s political party want.

New government in Greece

In Greece, Lucas Papademos, former vice president of the ECB sworn in as Prime Minister, replacing George Papandreou, whose political capital vanished in the last months, particularly after he announced a referendum, later canceled. Negotiations took longer than expected but finally came to an end that has been well received by markets. If Papademos is supported by the entire political spectrum, he could take the steps that the EU is demanding from Greece, in order to continue receiving financial aid. Greece is facing alarming financial difficulties and is getting ready to implement what was agreed on the EU summit on October 26. Evangelos Venizelos will continue to be the Finance Minister. The reappointment of Venizelos is a sign to the EU that Greece wants to do whatever it takes in order to remain inside the Eurozone.

Despite the change in names, the main problem of Greece, Italy and many other countries in the Eurozone remains in the economic front. The lack of strong economic growth continues to create more fiscal challenges and the austerity measures needed to balance budget exacerbate the problem. New names and new programs could help Italy and Greece to make more time, but the clock is ticking and the situation worsens as economic growth does not pick up.

The crisis in Greece and Italy, spurred contagion fears. Some analysts point to France as the next Italy. The spread between French and German bonds rose to the highest level since the introduction of the Euro during the week and particularly after S&P erroneously announced a downgrade in France’s rating.

The ECB is being pressured to take more action to curb current worries, like buying unlimited amounts of government bonds. According to Nouriel Roubini the ECB should dropped rates to zero and massively buy bonds, implementing quantitative easing. Roubini, who predicted the financial crisis of 2008, wrote: “Unless the eurozone moves toward greater economic, fiscal, and political integration (on a path consistent with short-term restoration of growth, competitiveness, and debt sustainability, which are needed to resolve unsustainable debt and reduce chronic fiscal and external deficits), recessionary deflation will certainly lead to a disorderly break-up. With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun. Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to the eurozone’s disintegration.”

Euro trims losses after changes

The new Greek PM and speculations about Monti becoming the next PM in Italy triggered a recovery in the Euro and in stocks. Markets in Europe finished the week slightly higher, after a strong recovery on Thursday and Friday.

The Euro had dropped sharply on Wednesday, suffering one of the worst daily declines in months. The EUR/USD bottomed at 1.3480 but bounced and is about to end the week above 1.3700, still down but considerably far from weekly lows. The improvement in risk appetite sent the Dollar lower across the board on Friday. The Italian 10-year government bond yield retreated further, and is about to close the week clearly below the 7% level.

Despite Friday’s optimism, Europe is still far from out of the woods.