Busch: European Vote Event Risk Starts Wednesday
Euro zone countries pledged in July to obtain parliamentary approval for key Stability Fund powers. It's taking a dangerously long time for the markets. ?
On July 21st, the 17 euro zone countries pledged to get parliamentary approval for the new powers of the European Financial Stability Fund. These range from buying bonds on the secondary market to making loans to members for bank recapitalization. Given the turmoil of last week and investors' focus on French banks, the recapitalization capacity is critical.
Sadly with all things Europe, they are slow to get things done. After agreeing to get approval, the politicians in Europe went on vacation without following through to grant the new powers. Europe needed these bank capitalization abilities six months ago to avoid the current dramatic price drops in Italian and French bank stocks. European parliaments are expected to begin the approval process in September, but clearly they are well behind the curve.
Here's a breakdown of the upcoming vote in the Netherlands , according to Reuters:
“Parliament reconvenes on September 6 but a vote on the EFSF/ESM changes is expected in October at the earliest. That would make the Dutch probably the last to approve.
The changes do not legally require parliament's approval, since they do not affect the size of Dutch guarantees for the EFSF. But politically the government needs its backing.
A majority last month supported the July 21 euro zone bailout agreement for Greece. The finance committee will meet next week, probably on Tuesday August 16, and has invited Finance Minister Jan Kees de Jager and Prime Minister Mark Rutte to discuss issues including the EFSF changes and to clarify details of the Dutch contribution to the Greek bailout. Some of the political parties have said they want to propose motions, and for this a plenary session of parliament will be required, tentatively scheduled for Wednesday August 17. These debates will show how much support there is among MPs for the EFSF changes and other rescue measures.
Any change of position by the opposition Labour party could derail the approval process because it is the second largest in the lower house. Prime Minister Rutte's minority center-right coalition of Liberals and Christian Democrats depends for support on the right-wing populist Freedom Party, which is against supporting Greece. The Freedom Party could threaten the approval process if it withdrew support for the coalition.
The Dutch government opposes increasing the size of the EFSF and insisted on private sector involvement in the second Greek bailout.”
Here’s what Dutch parliamentarian Wouter Koolmees of the left-liberal opposition D66 party told the Financial Times: “My basic sense is that there is still a majority for the rescue package…But there’s a huge pile of irritation, especially among the opposition parties that have supported it, over the way the government has presented things.”
Today, Prime Minister Mark Rutte said he did not like proposed euro zone rescue measures such as a common euro zone bond or a larger financial stability fund, according to Reuters. "You have to be able to impose sanctions. That comes before all that speculation of euro bonds or increasing the EFSF…I am not a fan of all those instruments."
This is the point: We will be subject to numerous votes throughout the euro zone for the EFSF's new powers, and this is not going to be as simple as the markets believe. These votes will provide a Tea Party-like opportunity for opposition parties in the remaining AAA-rated countries to express their dissatisfaction with bailing out wayward spending periphery countries. This will extend and expand the miasma of uncertainty surrounding the financial markets as we will have event risk with almost every vote. This will translate into equity selling, German and US bond buying, and US dollar, Swiss franc, and Japanese yen strength.
All this could start Wednesday with the Netherlands.
Andrew B. Busch Director, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him here and you can follow him on Twitter at http://twitter.com/abusch .
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