As EU officials begin their talks in Brussels, markets remain distrustful of their ability to come up with concrete solutions to the debt crisis. Earlier on Thursday rumors of Germany easing its stance on the Eurobonds, and the subsequent démenti caused the euro to spike to 1.2460 only to fall back later to the 1.2420/40 zone.
Léa Torbey Meouchi from Swissquote Bank does't believe that the outcome of the summit will give much relief to the common currency: “We expect no detailed plan of action out of this summit, but a vague agreement over a framework. The EUR will probably continue its downward move against its main counterparts, as we suspect no real relief will be provided in light of Germany’s resistance to move in the same direction than most of the EU members.”
According to reports EU leaders will start the meeting with a discussion on the activation of rescue funds which will be used for purchases of Spanish and Italian debt. It has also been made known that Jean-Claude Juncker will continue as the head of the Eurogroup, while Klaus Regling who until now held the position of the chief of EFSF will become the head of the ESM.
Spanish 10-year yield hits 7% once again
Spanish risk premium exceeded 550 points in the European morning, just ahead of the crucial EU summit. The yield on the country's 10-year bonds rose to 7%, which is considered a psychologically significant level above which debt becomes unsustainable.
The increase in Spanish borrowing costs reflects investors' lack of confidence that EU officials will be able to adequately address the debt crisis woes at the two-day meeting. Direct recapitalization of the distressed Spanish banking sector is one of the points on the summit agenda and until EU's decision on this issue is made known, bond markets will continue pressurizing the country.
Yields rise at Italian debt auction
Italy held a bond auction on Thursday during which it sold 5.423 billion worth of 5- and 10-year government bonds, meeting the target.
The yield on the benchmark 10-year bond reached 6.19%, in comparison with 6.03% seen at the last auction. The demand was weaker than previously. 5-year yields witnessed an increase to 5.84% (vs 5.66%) but the bid to cover ratio was 1.54, in comparison with the previous 1.35.
EU summit comes underway: expectations at bare minimum
The EU summit comes into action today, and with the expectations to come up with a comprehensible plausible solution to shore up the EU crisis at the bare minimum, many fear it will be another cheap talk without much substance.
Expectations are so low, and all banking research notes agree on it, that they'd better have to set the building on fire to miss them...
Irony aside, so far "there is agreement on a EUR 130bn growth package, a mix of unused EU structural funds and additional lending by the European Investment Bank" comments Standard Chartered.
Spanish and Italian PMs will be desperately seeking for an agreement of some sorts to use the EFSF/ESM to help their sinking economies, Germany is most likely to mantain a very firm view on what needs to be done first, namely the peripherial economies honouring their commitments to engage on fiscal and structural reforms.
Germany goes into the summit with a clear line of thinking on what steps need to be taken before they accept eurobills or instead a common deposit guarantee fund. Nations with weakening fundamentals have to first show strong commitment toward a political union.
German Chancellor Angela Merkel, who spoke before the Bundestag on Wednesday, urged other EU leaders not to resort to “quick and easy solutions” to the crisis.
"It is imperative that we don't promise things that we cannot deliver and that we implement what we have agreed,” the Chancellor exhorted. She reiterated her opposition towards the creation of Eurobonds and said that she expects “contentious discussions in Brussels”.
Also speaking before the parliament on Wednesday Spanish PM Mariano Rajoy signalized that he would try to convince the officials at the EU summit to do all they can to stabilize the financial markets. He stressed that should yields remain at such elevated levels for much longer, Spain would lose the capacity to finance itself.
"I will propose measures to stabilize financial markets, using the instruments at our disposal right now," the Spanish PM announced. "The most urgent issue is the one of financing. We can't keep funding ourselves for a long time at the prices we're currently funding ourselves."
The stakes are high and an unsuccessful summit for Monti, according to Divyang Shah from IFR Markets, "would lead to concerns that markets will only intensify their pressure on Italian debt, especially now that Spain and Cyprus have officially requested bailouts, and the political future of the Monti government would be considered short lived and early elections seen as most likely."
The summit, which may come with exaggerated headlines as a success when markets kick off next week, will most likely face the cruel reality, and that is, that the outcome is "likely to be no different from others and not enough to prevent the crisis from impacting more strongly on Italian sovereign debt" adds Divyang Shah from IFR Markets.