Sign up for our free newsletter to receive weekly news from BONDWorld
Click here to register for your free copy
For professional investors and advisers only
However, it is early days yet to say whether the euro area has finally stepped out along the path towards a more active management of the crisis.
The ongoing European Council seems capable of taking decisions aimed at also tackling the crisis currently under way, contrary to generally pessimistic expectations. Let’s round up the situation so far, although it should be said that information is as yet incomplete and the picture is subject to change:
1. The President of the Union confirmed that the rules for the activation of the EFSF and ESM will be changed, in order to allow their use “to reassure markets and get again some stability around some of the sovereign bonds of our member states”. Details will be defined at the Eurogroup meeting of 9 July. Mention was made of a “flexible” and “efficient” use of the funds: the latter expression could imply a preference for purchases on the primary market. Ex-post conditionality at least should be eliminated, adopting the terms of the existing stability pact, and the procedures for excessive deficit, at least for countries that are already meeting these obligations. The mechanism should be based on purchases of the debt of countries applying for activation of the programme by signing the MoU committing them to respect conditions. No indications are provided on other important aspects, such as whether interventions will be on the primary or secondary markets, if mechanisms will be put in place to afford the ESM greater financial leverage (such as access to Eurosystem refinancing), and/or whether paid-in capital will be stepped up to increase fire power. Also, statements diverge with regards to monitorino arrangements.
2. European funds may directly recapitalise banks, with no need for funds to first be inserted in the balance sheets of states, once the ECB will have obtained supervisory powers over banks. Initially, however, the mechanism will be the one already in place, which implies an increase in the public debt of the beneficiary member state. The innovation could have a strong impact also on the other countries already assisted by European programmes, such as Ireland and Portugal.
3. The ESM will not require status as senior lender over other creditors, at least for what concerns the recapitalisation plan for Spanish banks, that will be activated by the EFSF. This is the first acknowledgement that the request for seniority may compromise the chances of support programmes proving successful, although enthusiasm is cooled by the fact that it will not necessarily be applied to other programmes, including those aimed at supporting government bond markets.
4. An agreement has been reached on the platform for greater integration. In particular, on the issue of banking union the European Commission will promptly present its proposal for the establishment of a European supervisory authority, probably as part of the ECB. The first report on integration is due in October 2012, with a view to implementing the proposal on EU-wide banking supervision by the end of the year.
It is early days yet to say whether the euro area has finally stepped out along the path towards a more active management of the crisis. Several sources claim that Italy and Spain threatened to veto the entire package of measures if Germany, Holland and Finland did not abandon their attempt to restrict discussion to governance reform measures and to the growth package, delaying once again the definition of immediate support measures. This is a signal that, unfortunately, today’s news cannot be interpreted as the beginning of a virtuous process of stabilisation of the euro area markets.
Appendix
Analyst Certification
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Valuation Methodology
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.
Source: BONDWorld – Intesa Sanpaolo – Research Department
Newsletter
