Two-speed Europe

After this weekend's EU summit, we are further away from a EU single market than ever and Britain looks to be on its own. This brings back to mind how Henry VIII separated England from Rome in 1534.

Theological history aside, what Cameron has disagreed with the other EU states means that Britain will be outside a new intergovernmental treaty that has the backing of EU's other 26 states.

Below is a summary of the treaty details:
- The EU commits to a new “fiscal rule” that will be legally enforceable and will seek limits on structural deficits
- States running large deficits will face automatic consequences including sanctions
- The EFSF leveraging will be deployed more quickly, using the ECB as an agent in transactions
- EFSF financing will remain active until mid-2013
- The ESM will enter into force with a target date of July 2012
- The overall ceiling of the EFSF/ESM remains at €500bn, but will be reviewed in Mar 2012
- The EU will ensure that ESM paid in capital is at least 15% of ESM issuances
- Member States have 10 days to confirm provision of additional €200bn in bilateral loans to the IMF
- The EU “look forward” to parallel bilateral loan contributions from the “international community”

Looks like the Prime Minister will win some plaudits from his backbenchers tomorrow, but in the long term, Britain's influence in Europe has started diminishing...

Eric Tan,
London

23 October 2011

The Market is fixated with 23 October. People think that the European leaders are going to come up with a bazooka solution to the European crisis...
The Guardian this morning announced the prospects of a 2trillion euros EFSF bailout fund which no doubt will spur the market to continue it's wishful thinking, but why would investors want to plough their money in when European banks are trying to reduce their assets to raise capital. Think 1 trillion euros...or more... What they will end up selling will be the liquid assets and end up being stuck with a bigger proportion of the same assets that got them into trouble in the first place...

At what rate could you borrow? A question of LIBOR.

At the moment the spread between the high and the low fixing banks still stand at around 11bps. This shows how banks continue to just pay lip service to the definition if LIBOR. Result is that the rate remains lower than it ought to be expected if banks use this as a PR exercise to artificially manage expectations instead to reflecting their true cost of borrowing in this market condition. If you believe the numbers published, we should all go long the French banks...

Eric Tan,
London

Complacency?

This week, we received a stark reminder that regardless of how a) Europe-Sovereign agreements have been agreed, b) Corporate profits are beating expectations, c) US debt ceiling extension approved….

We cannot ignore the US economy. If US economy slumps, the world's economy slumps.
The US is by far the world's largest economy and it's most important.

This message have been hammered home with last Friday's GDP numbers and yesterday's ISM numbers.
Given trading desks are short-staffed due to summer holidays and trading volumes are thin, we should not forget that the last major corrections all happened in the summer of 2007, 2008, 2009 and 2010.

Now, that's for thoughts…

Eric Tan,
London