European Summit Extended as Leaders Scramble for Agreement

So European leaders have failed already in their promise to have a plan to deal with the continent’s debt crisis by Sunday and have subsequently extended the meeting from Sunday until next Wednesday. Politicians must have realized that with a lack of agreement surrounding the expansion of the European Financial Stability Facility further time for negotiation would be needed. The extended time period will also allow Chancellor Merkel to receive approval from a Bundestag budgetary committee. It will also allow them more time on Greece and the potential for increased write-downs of peripheral debt.

The current level of losses that private investors will have to swallow currently sits at 21% but is likely to rise to 60% in the coming weeks. The Germans want this move higher with the French the main opposition to the move as it would mean large losses for their already heavily indebted banks. Some draft proposals were published yesterday which gave risky assets a shot in the arm; they stated that bank recapitalisation conducted by the EFSF as a last resort would entail a restructuring of the financial institution.

Following riots and further civil disobedience in Athens the Greek government passed the latest round of austerity measures. The troika of EU/ECB/IMF officials who have been in country for the past months checking on the Greek government’s progress versus its debt reduction plan reported yesterday. While they stated that the government had made important progress they acknowledged that the country’s fiscal gap for 2011 will not be closed. They also recommended the payment of the next tranche of aid to Greece as soon as possible. There is the belief that with these boxes ticked we could see the Greek PM George Papandreou call early elections over the weekend which would further volatility to the mix.

UK retail sales came in better than expected yesterday and rose by 0.6% in September against an expectation that we would see no change. Back to school spending combined with a good bit of weather during the month seem to be the main catalysts for this increase. While not a spectacular number it does combine well with recent output and export numbers in the UK asn should mean that the first reading of UK GDP for Q3 should be ok. And I wouldn’t be betting on a rebound for the UK High St any time soon; high unemployment, squeezed wages and a stagnant housing market will make sure that hands stay in pockets in the coming months.

With the summit this weekend all eyes have to turn to Europe and we will be watching for headlines from the congregating Finance Ministers throughout the day but we suspect traders and market participants will want to avoid picking sides over the course of the weekend due to the monumental risk that the summit represents. From a structured data standpoint the only piece of information is the German IFO business climate survey due at 09.00. It is expected to follow the ZEW number lower and show that businesses are at their most concerned since mid-2009.

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