Pain in the periphery
Developments in Greece have been on the back burner lately in light of Mario Draghi’s announcements about potential ECB bond buying and the imminence of a Spanish support package. Still, Greece will return to center stage in September (if not slightly before, given that the new government is having trouble agreeing EUR11.5bn in savings for 2013-14 due on August 20th). The troika is due to return to Athens in September for a review and to make a ruling on whether to release additional tranches of funding to Greece. If the troika decides to cut off the taps to Greece—unlikely in my view, but possible—then Greece would face a hard default and would exit the EZ. The new Greek government aims to renegotiate the second bailout programme when the troika returns to town in September. If the troika plays hardball and does not extend the Greek government any concessions, then the Greek coalition would likely collapse. Also in September, the Greek parliament will have to pass a number of measures to generate EUR11.5bn in savings for 2013-14. With Greeks back in Athens after their summer holidays and with a high degree of austerity fatigue in Greece, we can expect to see social unrest.
Greece isn’t the only peripheral country to provide a spark in September. With Portugal’s economic performance contracting more than the troika had assumed, Portugal is likely to start slipping on its fiscal targets. Consequently, it is highly unlikely Portugal will manage to return to the bond markets next year, and the country should begin negotiations for a second bailout program as early as September. In Spain, auditors Deloitte, KPMG, PwC and Ernst & Young are due to present their full reports on the capital needs of Spain’s financial sector in September. The findings of this more detailed report together with the first one prepared by auditors Roland Berger and Oliver Wyman in June will be used to determine the exact amount the Spanish banking sector will need to borrow from the EFSF. Furthermore Spain is likely to request EFSF primary market sovereign debt purchases after the ESM has come into existence (earliest September 12th, when the German Constitutional Court rules on the legality of the ESM) but before it has significant bond redemptions in October (the biggest funding humps are on October 19th, 29th and 31st). In Italy, the general election campaign will begin in earnest once everyone is back from their summer holidays in September.
Calamity in the core
This September core countries will contribute to the drama in the EZ as well. The German constitutional court is due to vote on the legality of the ESM and the fiscal compact on September 12th. The court is almost certain to deem the ESM legal. Still, if this did not occur or if the ruling were delayed further it would serve a major blow to EZ policymakers, who are planning on relying on ESM primary market bond purchases to relieve the current pressure on Spanish and Italian sovereign bond yields. In France, the government is due to unveil its 2013 budget in September. The French government is in a no-win situation; if it announces large spending cuts then trade unions will protest and we may see social unrest, but if it fails to do so markets will be disappointed.
Unlike last September, the Netherlands threatens to cause uncertainty in the EZ this summer. A general election is scheduled for September 12th. Recent opinion polls suggest that the ruling right-of-center Volkspartij voor Vriheid en Democratie (VVD) will be unable to form a right-of-center majority government. Consequently coalition negotiations are likely to be protracted. Although the right-wing, Eurosceptic Partij voor de Vrijheid (PVV) has been losing popularity, the left-wing, Eurosceptic Socialistische Partij (SP) may win enough votes to be the second biggest party. This would make it more difficult for the new Dutch coalition—whatever its composition—to secure parliamentary support for additional measures for the peripheral countries.
Finally, a potential EZ-wide flashpoint falls in September when a progress report on establishing the ECB as a single banking supervisor is due. Given that many details on how this will work in practice have not been hammered out yet, there is plenty of room for disappointment on this first step towards a full banking union.
Plenty of traders have been complaining of boredom this August. They should rest assured that next month promises to be a doozy.