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September 7, 2012 5:22 pm
The stunning two-day rally in eurozone debt markets after Thursday’s European Central Bank decision to overhaul and restart its sovereign bond buying plan is not the first time traders have cheered what appeared to be decisive action by European Union policymakers.
In the past, however, that optimism has often been followed by sharp sell-offs triggered by rating downgrades, bungled communication or leaders failing to follow through on the policies they had promised.
Senior EU officials have insisted Thursday’s decision was different, arguing Mario Draghi, the ECB president, for the first time has promised the central bank’s bottomless pockets will be opened up indefinitely for countries requesting help.
But they also acknowledged the burden was now on political leaders, particularly in Spain, to accept Mr Draghi’s bargain of help in exchange for tightly-monitored economic reforms. Some also privately fret Europe is next week entering another month-long period of turbulence where hard-won momentum could be reversed.
“The ECB may have left it too late,” said Sony Kapoor, head of Re-Define, an economic consultancy. “Any number of unfavourable economic and political developments that could otherwise have been easy to manage may now be much harder to contain.”
Officials are nervously watching Wednesday’s Dutch national elections where, until recently, strong polling by two eurosceptic parties – the far-left Socialists and far-right Freedom Party – was forcing Mark Rutte, the sitting Liberal prime minister, to turn increasingly anti-bailout on the campaign trail.
Mr Rutte has promised Dutch bailout loans to Greece will not be restructured, something being actively contemplated by eurozone leaders, and has vowed no new bailouts for Athens despite widespread recognition such additional aid is likely.
As one of the few remaining triple-A rated eurozone countries, the Netherlands retains outsized influence in crisis discussions, and a strong showing by anti-bailout parties could prevent a new government from agreeing more help for struggling southerners, particularly Greece.
But recent polling has shown a surge for the more pro-EU centre-left Labour party, which has pulled to within one seat of Mr Rutte’s Liberals.
Germany and the ESM
On the same day, Germany’s constitutional court is scheduled to rule on whether the eurozone’s new permanent €500bn rescue system, the European Stability Mechanism, violates the country’s basic law.
More than 37,000 German citizens have signed onto the challenge on the grounds it exposes German taxpayers to funding the ESM without proper democratic control over how those funds are used.
A ruling to stop – at least temporarily – the ESM would throw rescue efforts into disarray since the existing, temporary €440bn fund is running low on cash and is due to expire in less than a year.
The broad consensus among legal experts is the court will stop short of a drastic decision forcing a halt to the fund, but judges are expected to attach strict conditions to any further German financial aid.
Madrid is expected to unveil a highly-anticipated “bottom-up review” of its banking sector as early as next week. Spanish officials are selling the review as the defining act in persuading markets that no more nasty surprises lurk within the country’s financial system.
Luis de Guindos, the Spanish finance minister, has indicated the review will show banks only need an additional €60bn of the €100bn offered in aid from the eurozone bailout fund, a sign the review has not uncovered any unwelcome surprises.
But private estimates are as much as double that figure, and some weaker banks are showing signs of deteriorating faster than expected. Bankia, which requested €19bn in state aid in May but has yet to receive it, was given an emergency €4.5bn bridging loan from Spain’s state bank rescue fund this week following large losses in the first half.
The end of the month will see eurozone leaders forced to yet again grapple with Greece after inspectors from the so-called “troika” of international lenders render their verdict on how far its second €174bn bailout has slipped.
Senior EU officials believe the programme is at least €20bn behind plan, meaning eurozone governments will either have to offer up more money, accept cuts in repayments of existing loans or force Greece to accept more austerity.
Officials say eurozone leaders are applying intense pressure on Antonis Samaras, prime minister, to make concrete progress over the next three weeks so those in bailout-wary northern countries can point to progress if they are forced to go back to their parliaments for more Greek help.
Additional reporting by Miles Johnson in Madrid and Quentin Peel in Berlin
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