German “yes” is not enough

Ten countries already approved an expanded EFSF. The list includes Belgium, Greece, Finland (yesterday), France, Spain, Ireland, Luxemburg, Portugal, Slovenia and Italy. Germany is likely to join the club as the Bundestag votes today. But a positive result – widely expected on the market – is not enough.

First of all, there are rows within the ruling coalition. The vote seems to be safe not because the coalition is strong and unified but because the SPD (in opposition) declared a support. On the other hand some deputies from the coalition signaled that they may vote against the expansion. If the vote passes only because the opposition supports it, it would deal a serious blow to the government. The market already has an interpretation – Merkel would be even more cautious when it comes to further measures.

Here comes the second point. What the German parliament is voting on today might have looked sufficient back in July. Currently it is fairly obvious that more steps will need to be taken. Those include a more aggressive debt relief for Greece and possibly another expansion of the EFSF. Therefore investors are rightly afraid that if a process of acceptance of July’s agreements involves so much political wrangling, it will be even more challenging to form a political backing for more courageous measures.

After an upbeat first half of the week, optimism waned somewhat yesterday in the afternoon. We have an interesting situation on the DAX30 futures. The bulls – fueled previously by a double dip prospects – were unable to move past a resistance at 5670 pts. and make a new local high. This level is also a possible neckline for that double dip (with lows 700 pts. lower) so the test – and a possible impact of the vote – will be of a high importance.

Przemysław Kwiecień PhD, Chief Economist

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