Euro summit today

illustration: euro

(21.07.2011) The heads of state in the euro area meets for a summit today, trying to reach an agreement on a new emergency plan to ease the Greek debt situation. In the US, Obama opens up to the possibility of a short-term increase in the debt ceiling, to give the parties a few more days to agree on the long-term budget plans.

By Kjersti Haugland, Senior Economist at DNB Markets

The euro leader summit starts at 11.00 GMT today, and the agenda is to agree upon a new emergency plan for Greece, making the country independent of market funding until 2015. Two days ago German Chancellor Merkel warned against having hopes of a final and "spectacular" outcome of the summit.

However, yesterday she reached an agreement with the French President Sarkozy that will be presented at today's meeting. This has spurred new hopes about the possibility of a solution at today's meeting, and has contributed to strengthen the euro. Long-term German and US government bond yields has increased somewhat.
The euro members will have to contribute with more money. However, the tipping point in today's negotiations is to decide how much, and in which manner, private investors should contribute in the sharing of the burden. Germany, in particular, has been advocating that the private sector should be a significant part of the solution, in order to shield the tax payers.

Rating agencies have, however, warned that any agreement involving extended maturities or automatic roll-over of existing debt by investors, voluntary or not, will be characterized as a selective default and lead to a further downgrade of Greek bonds. The ECB has strongly warned against such an outcome, fearing that it could lead to increased distrust and distress in markets, casting doubt upon the debt servicing capability of other, larger countries. Also, the ECB would (with today's rules) be unable to offer liquidity to Greek banks against collateral that has been downgraded to selective default status.
According to the Financial Times Merkels' and Sarkozy's proposal involves a tax on euro zone bank's assets, where the proceeds will be used to buy back 20% of Greek government debt, currently at 350 bn euro. This solution means that investors are involved, but at the same time the label "selective default" by rating agencies is avoided. European banks, represented by the Institute of International Finance (IIF) have made it clear that they will not accept such a tax, and that they will go to court to fight it. They argue that a flat tax on all banks will be unfair, since different banks have different exposures to the risky government debt.
On the other side of the Atlantic there is no news about the progress in the debt negotiations between the Democrats and the Republicans. Obama's deadline expires tomorrow. The president now opens up to the possibility of a short-term increase in the debt ceiling, in order to give the parties a few extra days to agree on a long-term budget plan.
The minutes from the monetary policy meeting in Bank of England two weeks ago was published yesterday. The key policy rate was left unchanged at the meeting, but the minutes showed that the MPC-members Weale and Dale still voted in favor of a hike. They are worried about the possibility of a feed-through of today's high inflation into firms' and households' inflation expectations. If the steep decline in core inflation in June (released one week ago) signals the start of a broader decline in inflation, the hawks may change their minds going forward. The development in the UK economy is very weak at the moment, and will hardly pick up significantly during the next few years. The minutes were marked by the disappointing news about the economy lately, and "most members" felt that current developments had reduced the likelihood that a tightening in policy would be warranted in the near term. Today's release of UK retail sales in June is expected to show a slight rebound, increasing 0.5% m/m after June's 1.4% decline.
The quarterly Norwegian bank lending survey is released today, and we expect households to have increased their demand for credit further, in the wake of surging house price growth since September 2010.