EU summit draft

CNBC and DJ are reporting that EU members have agreed to proposals that have been discussed for weeks, 1)The creation of a fiscal compact that will likely encompass an EC commission that will stand as an oversight of EU budgets and a Court that will be the enforcer, 2)The ESM fully in place by July 2012 that will stand side by side with the EFSF instead of replacing it, 3)EU to follow IMF protocol on private sector involvement in debt restructurings which means voluntary debt exchanges instead of forced, and 4)Euro area central banks will likely provide the IMF with bilateral loans (which then get recycled into loans back to Europe). On the ESM, some want it to be considered a bank and thus be able to access ECB funding but the Germans seem to be dead set against it. With respect to the markets, while the possibility of an agreement was always uncertain, Merkel and Sarkozy shook hands on all of these proposals on Monday so today was just convincing the others in the region. It was the ECB response to the EU summit that markets were looking to and Draghi told us what he thought today. Now will Draghi change his mind next week and say he liked the draft and maybe instead of buying 5-10b euros a week of sovereign debt, he’ll buy 10-20b and sterilize (because he doesn’t seem to want to print right now)? Maybe or maybe not. Bottom line, the market has become completely untradeable with all that is going on in Europe.

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