Skepticism over EU summit being fruitful grows: StanChart

An unexpected turn of events has forced the troika - the European Union, European Central Bank (ECB) and International Monetary Fund (IMF) to postpone their visit to Athens after the Greek prime minister and incoming finance minister took ill.

This week’s EU summit will be skipped by both the PM and incoming FM of Greece. Athens, however, will propose easing the terms of its bailout even as Germany’s Angela Merkel remains particularly resistant in giving the debt laden nation any extended financial lifeline.

Sarah Hewin of Standard Chartered talks about what global markets are possibly expecting from the EU summit and what can practically be delivered.

Below is an edited transcript of her interview. Watch the accompanying video for more.

Q: What are the expectations that the market is going with into this European summit?

A: It’s difficult to say. There were some pretty strong expectations about what might be achieved from the EU summit. The European commission had indicated that there would be a road map and a calendar for achieving closer integration. But when people are really picking through the details of what's going to be discussed and also look at what Germany is likely to agree to, there is growing skepticism that anything significant can be delivered on Thursday and Friday.

Q: Is it fast becoming Germany versus rest of Europe?

A: Germany has a very strong position. They really hold the purse strings. At the same time there is resistance within Germany to writing a blank cheque. They are portrayed sometimes as the villains of the peace but essentially without Germanys support the Euro area does fall apart. We have to listen to what the German concerns are and particularly these relate to euro bonds, Germany doesn’t want to underwrite public spending by the rest of the euro area. Germany doesn’t see why it should cover the recapitalisation of banks elsewhere.

Q: There was also talk about the growth revival package 130 billion euro. The markets are not really excited by what it saw. What do you think has led to this disappointment in the market today? Was the market expecting some clarity on the euro bonds at the Rome summit that happened on Friday?

A: The growth package first of all is seen as being probably too small to really deliver a strong boost to economies that are currently going through austerity. In terms of the pessimism we have had some pretty stark statements from German Finance Minister Wolfgang Schaeuble over the weekend both in relation to Greece and from Merkel in relation to support for  the euro bonds. So it is more of a reality check that people are realising that Germany is not going to just sit back and agree to open ended payments when so much is at risk.

Q: Does it now shift the onus to the ECB to do something say a 25 basis point rate cut? Is that factored in? What else could excite the markets in the near-term?

A: There are lots of different issues that the markets are focusing on in addition to this summit, although this summit is obviously the key point. The Greek negotiations need to be remembered. Those are being delayed because of health problems amongst the Greek leaders. It looks likely that the troika will be visiting Athens from next week and those negotiations could cause some problems as well.

In addition getting the permanent bailout mechanism operational, that’s in question at the moment. It should be kicking of from the beginning of July, but there may be delays potentially from the German constitutional court. So, it is important to keep an eye on that.

From the European central bank meeting, we have been flagging for some time now that there would be another rate cut this year and expect that to come in the third quarter. The markets are expecting that it could come as early as next week. The question is will the ECB also do another LTRO, another liquidity operation and that’s something which we will be watching closely.

Q: So, that will be the next band aid you think, largely ECB measures? From the EU can you expect anything that will positively cheer the markets?

A: Positive outcomes to the discussions on Thursday and Friday would certainly be supportive.

Q: What would you construe as positive?

A: They are the sort of things that we think at the moment aren’t likely. I guess a move to euro bonds and a single deposit insurance scheme. But in our view it’s unlikely that we will get those in the format in which they would genuinely deliver a proper firewall to the euro area if in the event that the Greek crisis escalates.

Q: We have been talking about these measures that the euro zone politicians need to take. We have had this collateral easing by the ECB which has kept Spanish yields in check for now. If concrete measures are not taken now, how much time do we have before we stare at another crisis again?

A: It all depends on confidence. For Greece it’s a country which was insolvent. It needed to have debt restructuring and its problems linger on. For Spain and Italy, we can argue that these countries have high debt. In case of Spain it’s a debt which is private sector as well as public sector. They have high debt, but if confidence holds up then they can continue to borrow in the markets and they can work through their problems.

If confidence dissipates then borrowing costs rise very sharply, then it becomes a lot tougher. So, it’s impossible to tell; we just have to flag the risks that in fact confidence could give way over the summer.