You would think after twenty or so major and mini summits over the period since the Greek saga commenced, the European leaders would have enough experience to have successful productive summits.
We are headed for another important gathering in Brussels on Thursday and Friday and, unlike the pre summit optimism at the early meetings, there is now apprehension this meeting will fail to provide an answer.
The negativism was expressed in Spiegel Online today when they said:
“European leaders have been muddling through instead of properly tackling the debt crisis. Now it threatens the very foundations of the European Union and could destroy a lifestyle that millions of Europeans take for granted. But the high expectations for this week’s summit in Brussels can only be disappointed.”
If the advice of Henry Kissinger from a few decades prior had been heeded, the results might prove different. Kissinger believed summits were scheduled only after there was a mutually agreed outcome, for at least a portion of the agenda. Sadly that does not appear to be the case for this week’s meeting.
Instead, we seem headed for a clash between those countries with ample sovereign debt and under-capitalized banks, and the diminishing number of financially-sound countries. Resentment against Germany is building. The meetings have the potential to deliver acrimony rather than solutions.
With the cost of refinancing Italian and Spanish debt soaring, however, it is important to find a mechanism to loosen credit. Today, Spain was able to raise 3€B but only very short term 3 and 6 month debt. At a cost of 2.35% for the three month and 3.24% for the six month bills, this represents a 2- and 3-fold increase in rates at the last auction. Further, if you can only sell short term bills, you are almost frozen from the credit markets. This cannot continue without another bank/liquidity crisis.
It does not appear the Germans are going to alter their position so it would seem the European Central Bank must take some steps to expand the credit availability. They may be located in Frankfurt, and influenced by the Bundesbank, but their obligation should be for the entire euro community. Expanding the size of their loan portfolio is one option.
Another action the ECB might take is to reduce the bank rate at the meeting on July 5th. Remember, that rate was elevated by Jean-Claude Trichet to fight the high price of brent crude, which was causing inflation. With the price of brent $30/barrel off the high, and the Euro economy flirting with a recession, it is well past the time to cut the rate.
Granted, these actions would merely kick the can, and then not that far. The real problem may be caused by politicians who bought votes, promising their constituents a lifestyle that was not funded, and could not be funded, with a contracting economy.
The troubled reality of Europe and the single currency, unlike prior summit weeks, is under pressure. So far the break has been contained in an area of minor support around 1.2440. Failing this level, a return to the 1.23 handle looks like a target for the bears. As we noted in our COT Report, the specs reduced their long positions by 49K contracts in the futures markets; however, they remain a net short of 176K contracts.
Market action differs from that prior to other pre summit trading sessions. Then it was generally brimming with optimism, often taking the market higher and anticipating the best. It then seemed like the euro would sell off after the meetings. Will the market take the other tact this time? We sell off this week and rally next?
There have been more stories about the pending demise of the euro. Usually when there is a dynamic change such as this, it is preceded with a dynamic political or financial event, and a wash out in markets. Such has yet to happen.
We prefer the short side of the EURUSD with a target in the 1.23 area.