Positive ruling by German Constitutional Court

The German Constitutional Court (the “Court”) ruled that the German President could sign off on the ESM, thereby making it effective. Furthermore, the Court rejected requests to impose an injunction to block the German President from enshrining the ESM into law. The Court stated that such requests were “fundamentally unfounded”. My very clued up German friends advise me that the Court’s opinion that objections to the ESM and related matters are “fundamentally unfounded”, strengthens Mrs Merkel’s position, whilst undermining her opponents and, importantly, makes subsequent challenges far more difficult.

The Court added that the maximum liability to Germany must be capped at E190bn and cannot be increased, without the prior approval of the German Parliament, the Bundestag. The bill establishing the ESM was passed by a 2/3rds majority last time around, mainly due to the support of the (even more pro EU) opposition party, the SPD. Whilst the SPD may play games for party political reasons, the ruling suggests that Mrs Merkel has flexibility and can continue to push forward with her agenda for banking, fiscal and ultimately political union in the EZ, though the process will take time. I must say I had expected the Court to impose far more stiffer conditions.

The Court ruling also settles a major uncertainty, which will be positive for markets.

The EU’s Mr Junker, suggests that the 1st meeting of the ESM could be held on the 8th October. With the ECB ready to buy short term debt in the secondary markets in unlimited size, and the ESM capable of buying medium/longer term debt, there is a measure of stability in the EZ, for the moment, though these policies are far from being a permanent solution. The EZ needs to implement some growth measures. In addition, at E500bn, the ESM is insufficient for its task and will have to be leveraged, but that’s a story for another day.

The news is positive in my humble view and peripheral EZ country yields have declined, whilst German yields have risen – no great surprise. In addition, the Euro has strengthened, currently trading at E1.29, though off its highs – looks as if it will rise further. In addition, the Court’s decision is supportive of European financials.

The EU has proposed that the ECB supervise all EZ European banks. Germany suggests that the supervision should be limited to the EZ’s major banks, mainly as Germany is reluctant for the ECB to supervise their (politically sensitive) regional banks, which will need additional capital.

The most recent Dutch polls, (the general elections are being held today) suggests that the Liberal party (centre right) and the Labour party (centre left) are neck and neck. Both parties are relativity EU friendly, though the head of the Liberal Party, Mr Rutte, has stated that Holland will not provide any further funding for Greece. A coalition involving the Liberals and the Labour party, with one other party at least, is the most likely coalition and is positive for markets. There were concerns that anti EU parties would gain support.

To date, the Spanish PM, Mr Rajoy has stated that he would not agree to a bail out, which included conditions. This position is utter nonsense. The ECB has stated that their proposal to buy short term (up to 3 years) debt is subject to the relevant countries adhering to certain predetermined conditions. Spain, inevitably, will have to cave in, certainly before a major funding requirement in October.

If anyone knows where Mr Xi Jinping, please let us know. Mr Xi, who is expected to be appointed as President, has not been seen for over 10 days and, in addition, has had meetings canceled with amongst others Mrs Clinton and the PM’s of Denmark and Singapore. The Chinese Twitter space is abuzz. Hmmmmm.

Off to Cambridge to attend a You Gov conference for the next 2 days, so no notes tomorrow or Friday you lucky people.

Today’s announcement by the Court suggests that markets will be in a Risk On mode and if the FED delivers on QE3 tomorrow, the markets look as if they have further to rise.

Kiron Sarkar

12th September 2012

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