EU summit to examine Spain, Greece and banking union

This week investors will be watching and waiting for this Thursday and Friday’s European Summit in Brussels where leaders will concentrate on such topics as a bailout for Spain, the situation in Greece and the banking union. However, as is often the case, market expectations are low for this meeting of the heads of state of the 27 member countries.

Credit Suisse analysts explain that market sentiment on such issues as a direct recapitalisation of European banks by the ESM permanent bailout fund or the creation of the banking union will not be resolved this week. “We expect this statement to be similar to the one they gave last June. There won’t be decisions made on mechanisms to better control individual nation’s budgets or on assistance to problematic countries. Those are decisions that will be undertaken much later,” they say.

Spain continues to avoid requesting the European Central Bank (ECB) to activate its OMT debt purchasing programme since it would be considered to be a bailout. Credit Suisse doubts a call for help will come anytime soon and a weekend report from Reuters suggested it won’t be made until November.

Indeed, Barclays suggests that no request will be made by the central government until after regional elections in Galicia on October 21st (regional elections are also being held next Sunday in the Basque region of Spain). In this context, the broker recommends keeping an eye on the Spanish bond auctions both tomorrow and Thursday, especially after the recent downgrade by S&P.

Link Securities holds that “for the moment at least, the possibility of the country requesting a bailout in the short-term seems to have cooled off. This isn’t just because of the Spanish government’s political agenda but also because of opposition from Germany and ‘ally-countries’ such as Holland and Finland that don’t wish to suffer from the political damage that yet another Eurozone bailout would cause. Until it’s absolutely necessary, these countries want to delay Spain’s request.

“As has come to be ‘business as usual’ in the Eurozone, problems are neither dealt with nor solved. Agreements aren’t followed and each state’s government is always looking out for its own interests. This is the main reason why investors have lost faith in the region’s potential and we can see this in the last three years of fixed income and equity behavior in the area.” 

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