Euro and the ESM – a long way to go

Posted by on Sep 7, 2012 in Commentary, Featured, Market News, News

Euro and the ESM – a long way to go

Yesterday’s announcement of unlimited support for the Euro from the ECB was widely expected. Indeed, the leaks have been coming as often as the rain showers. The pre-conditions for the buying of government bonds was also widely trailed.

So yesterday’s announcement by Mario Draghi was just the confirmation of what we already knew. The ECB would buy unlimited short dated bonds from governments in financial trouble, as long as those governments confessed and accepted the road of supervision from institutions such as the IMF.

This announcement was aimed at preventing Spain and Italy from wreaking havoc in the Eurozone. Yesterday, the value of the Euro flickered but remained largely unchanged. This suggests the move was largely priced in by the markets already.

So far, there has been no sign that Spain or Italy are going to seek assistance. So the reality is yet to play out. A far greater test to the Euro stability could come as early as Wednesday next week, when the German constitutional courts make their ruling on the legality of the ESM, the European Stability Mechanism.

This is the fund at the heart of the bailouts. Were the German courts to rule against the German contribution to the ESM, the whole Euro project would start to unravel again very quickly. Germany contributes just over a quarter of the €450bn.

Although a ruling against is unlikely, the court may impose conditions. That could then lead to more uncertainty. Less than a week to go now to find out the next step in the Euro experiment.