So, was it worth the wait? The German constitutional court decision that has been cited as a risk event for weeks now has delivered its verdict on the legality of the permanent eurozone rescue fund (the ESM) and it’s broadly falling into line with expectations. In other words, it was a “Yes” going ahead of final ratification, but with the expected caveat that German’s liability would be limited to the €190bn as determined by relative capital shares.
The euro has reached session highs on the back of the news (nudging above 1.29), but has not soared away. Yesterday EUR/USD closed above the 200d moving average for the first time since late October 2011 and there has been a considerable shake-out of bearish positions over the past few weeks.
We still await the full details from the court itself, but the question to ask is how any further capital contributions are approved. If Spain does ask for a bailout and is unable to fulfil its capital contributions to the ESM, there will be a short-fall in paid-in capital. A Spanish bailout would likely see Germany (and others) having to up its capital subscription (i.e. beyond €190bn), if the total ESM firepower is to remain the same. We alluded to this issue back in June (The holed eurozone lifeboat). There remains a breaking point at which the realisation will dawn that a credit crisis cannot be solved by piling on more and more debt.