Yesterday, Slovakia became the 17th and final country to ratify the EFSF expansion.So what’s next?
Some quick thoughts form Morgan Stanley
Finally, the EFSF has been ratified and the reformed fund can now spring into action. The EFSF press release suggested that it will not allow its triple A rating to be affected by any moves to increase the fund’s efficiency. Hence, there will be little room for leverage suggesting other options may have to come into play.
This weekend’s G-20 Finance Ministers meeting will prepare for the G-20 Summit, due on 3 November in Cannes. A higher degree of global co-ordination is required and the headlines produced this weekend may tell us if things are on a positive path. We take the opportunity to investigate how much additional financial help EMU can expect from the IMF or from sovereign funds. After the US, EMU is the globe’s second biggest market and EMU staying in troubled waters will have ramifications going beyond the region. However, EM countries may have second thoughts about seeing their IMF contributions used in an area where income levels are often a multiple of EM countries’. Equally, sovereign accounts have reduced their EUR purchases and before these flows come back, EMU risk premiums will have to come down.
Hence, EMU will have to come to its own rescue. The EU Heads of State meeting on 23 October may include discussion of a roadmap towards fiscal and political integration. Headlines are likely to be positive, but investors should consider that Germany may need a public vote to hand over additional sovereign rights to Europe. Fiscal integration will be time-consuming and, in our view, financial resources provided by the EFSF are likely to be inadequate to keep peripheral bond markets supported. Bringing the ESM forward and providing it with a bank licence suggests an indirect monetization of debt. We would expect the EUR to weaken should this scenario play out.