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SocGen economist Michala Marcussen has a fantastic note out this morning putting together some of the puzzle pieces to figure out what's going to happen next in Europe.
First, Marcussen sets the scene: There's hype ahead of the September 6 meeting. There are all kinds of pre-meetings planned. Rumors are flying in the press.
Suspense is mounting ahead of the 6 September ECB meeting where markets hope to see the modalities of the new non-standard measures unveiled. Press is rife with debate on the possibilities and, on Monday, Italian Industry Minister Passera criticised an excess of "incoherent and
disruptive communications which have also disturbed markets." One message is clear and consistent, however, there will be further risk sharing in the euro area, but NOT without conditionality. Conditionality is a political process and will take time, a conclusion that is entirely consistent
with steeper peripheral yield curves.
Euro-area crisis resolution talks are still ongoing at both the ECB and amongst European leaders. Chancellor Merkel is due to meet President Hollande on 23 August, Prime Minister Samaras on 24 August, Prime Minister Monti on 29 August and Prime Minister Rajoy on 6 September – coincidentally the same day that markets hope the ECB will unveil the modalities of the new non-standard measures announced by President Draghi at the 2 August ECB meeting.
In our opinion, there is today no final blueprint ready. The Bundesbank’s Monthly Report (released Monday) offered some new clues, however. Weighing these along with other available evidence, several points stand out.
Marcussen then lays out 5 points, which we shall summarize:
  • Conditionality is key. There's no way that countries are going to get major aid without submitting to conditions on budgets and oversight. This the Germans have always been clear on...
  • The ECB will only target shorter maturies. This Draghi has made clear, and it is consistent with the notion of conditionality.
  • ECB bond buying could be unlimited. Draghi hinted at this, and even the Bundesbank acknowledged this.
  • Risk sharing is not risk elimination. There is always risk, even in Germany.
  • The Bundesbank still doesn't like bond buying.
So the blueprint isn't there yet, but a lot of hints are coming.
Pay close attention to the upcoming meetings between the various leaders: Monti, Hollande, Rajoy, Merkel. That's where a lot of political work will happen to grease the wheels for the ECB.
Finally, Marcussen believes that all of this is consistent with the latest "bull steeping" in the European peripheral bond markets, whereby yields are coming down everywhere, but doing so a lot faster at the short end, while still remaining quite elevated at the long end.