All Night EU Summit Sees New Promises, New Tensions

Outlines of EU summit deal becoming clear, as the EU announced that a treaty change will be written by March. Meanwhile, the market is clearly underwhelmed by new measures put forward at the summit.

Another all-nighter for EU leaders, much like the negotiation marathon that took place back in late October. The result? EU leaders agreed that a new treaty will be written in March, though it will do so without support from all 27 of the EU as the UK and Hungary will not participate. Franco-British tensions are acute as Sarkozy found unacceptable British proposals for exemption from some of the new financial regulations proposed for the new treaty. (Key to understand that this is a new treaty and not a rewrite of an old treaty – so without Britain and Hungary on board, their attachment to the EU becomes rather tenuous to say the least.)

A quote from David Cameron after the negotiations:
"Without protections for the single market and for other key British interests, without those safeguards it is better not to have a treaty within a treaty but to have those countries make their arrangement separately, that is what is not going to happen.

Britain's interest in the European Union, keeping markets open, free trade, selling our good and services with rules over which we have a major say, all those things are protected, they don't change.

But this new round of integration and special powers and surrenders of sovereignty for European countries and other that what to join the euro, they will be carried on outside the EU treaty. So we will not be presenting this treaty when it is agreed to our Parliament."


Meanwhile, new measures were announced attempting to get ahead of the sovereign debt crisis, as EUR 200 billion was promised to the IMF (150 billion from the Euro-17 and 50 billion from the rest of the Euro Zone members). That is a mere token measure seen in light of the size of the funding shortfall. The apparent hope is the IMF commitment will inspire other nations to commit funds as well. Meanwhile, the European Stability Mechanism, originally planned for 2013, will be set up by July of 2012 and word is that the EU will review whether the funds size should be capped at EUR 500 billion. No word on where those funds would come from. Germany also caved on its previous stance on “private sector involvement” for sovereign bond losses.

New deficit rules were also proposed for the new EU treaty and these would cap structural deficits at 0.5% of GDP and require that countries employ an “automatic correction mechanism” if that level is exceeded. More “intrusive” measures would be put into force if the budget moved above 3% of GDP. This is a part of the overall new policy of more strict “debt brakes” on EU members.

All in all, this actual agreement is nothing particularly new or surprising versus expectations, though it does introduce the threat of Britain walking away from the EU (could other of the “stronger countries” also consider such a step in their best interest?) The key now – in terms of the immediate liquidity needs versus longer term fiscal and sovereign debt stability – is what and whether “other elements” alluded to by Draghi last week (on the condition that EU leadership showed a more robust new fiscal compact) will be put into play – or was that the list of measures we already saw at yesterday’s ECB meeting? Questions abound and risk is very much off, as the critical issue of liquidity remains insufficiently addressed - funding needs in the pipeline- even just those for Spain and Italy, may outstrip what this plan offers by the time of its March implementation.

To spice thing up, the Moody’s bond ratings agency downgraded the largest French banks, including the world’s large bank by balance sheet size, BNP Paribas, citing creditworthiness. Italian bond spreads opened wider versus Germany, with the 10-year trading above 6.5% after bottoming earlier this week at 5.75%.