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Week Ahead (25 May)

w/c Monday 25 May, Confrontation between Atlantia and Conte administration flares again

Atlantia’s share price is once again under pressure after its longstanding confrontation with the Italian government re-emerged over the weekend.

This latest flareup concerns M5S Under Secretary for Economic Development Stefano Buffagni publicly rejecting Atlantia subsidiary Aspi’s application for €1.25 billion in guarantees from SACE – a mechanism activated by the Italian government to help Covid affected businesses as part of the ‘liquidity decree’.

Without waiting to see if this was the position of Buffagni, a marginal figure from the radical wing of M5S, or the government as a whole, the board of Atlantia ordered Aspi to freeze its preparation for a €14.5 billion investment plan and to mandate its lawyers to explore its legal options against the state. This reaction has infuriated Atlantia’s erstwhile allies within the Conte administration and fired up the M5S crusade against the company once again.

While these developments do not materially alter our base case which is that revocation will be avoided, it will however complicate the company’s efforts to access SACE guarantees and it may be the case that another solution will have to be found to liquidity shortages.

Wednesday 27 May, European Commission to present Covid-19 ‘recovery fund’

Markets, and BTPs in particular, reacted favourably to last Monday’s Franco-German proposal for a fund to help the EU economy recover from Covid-19.

On Wednesday the European Commission will publish details of its proposal for a recovery fund in full. It is worth noting that the adoption of this proposal requires unanimity among the 27 EU Member States.

Already, Austria, Sweden, the Netherlands and Denmark have indicated their opposition to the distribution of grants, rather than loans. A compromise will likely be required which will see at least a portion of the €500 billion suggested by Macron and Merkel allocated in the form of loans.

It is also unclear to what extent Italy, as a net contributor to the EU budget, will benefit from the fund. Conte has reacted cautiously to the proposal and will also be pushing back against proposals to limit Chinese investment in Europe, which were included in the Franco-German proposal. The European Commission will need to balance all these contrasting views in order for the fund to be approved in a timely fashion.

Wednesday 27 May, House of Commons Committee on the Future Relationship with the European Union to hear evidence on progress in UK-EU negotiations while Boris Johnson appears before House of Commons Liaison Committee the same day

On Wednesday Michael Gove MP and David Frost, the UK’s Chief Negotiator with the EU, will testify before a Commons committee on progress towards a UK-EU free trade agreement.

Frost is likely to come under fire since there will be little progress to report on since the first round of talks in early April, while the 30 June deadline to agree an extension to the transition period is looming. There is some suggestion within Conservative circles that disruption to supply chains associated with Covid-19 make leaving the EU single market without a trade deal less costly than before. Whether this is true or not, it points to the UK continuing to take a tough line in these negotiations and makes a ‘no deal’ outcome more likely.

Before the furore surrounding his adviser Dominic Cummings emerged, Boris Johnson had already agreed to appear before the House of Commons Liaison Committee to answer questions on the government’s approach to Covid-19. The Committee Chair Bernard Jenkin has a long standing enmity towards Cummings which will all but ensure the scandal remains front and centre of the media agenda for most of this coming week.

Thursday 28 May, European Commission to meet with banking industry representatives

The European Commission (EC) is concerned about the potential for an unbalanced recovery from Covid-19. Germany has accounted for approximately 50% of the ~€1.9 trillion worth of state aid measures approved by the EC since the onset of Covid-19. With that in mind, on 28 May the EC will host a meeting of banks, nonbank lenders and insurers plus consumer and business representatives with a view to promoting consistency in support measures across the EU, where possible.

Eurozone banks have already benefited from a lowering of capital requirements to assist in facilitating trading as a result of the health crisis. The temporary relaxing of requirements will be reviewed in 6 months and in exchange European regulators will expect banks to play their part in facilitating an economic recovery.

Friday 29 May, Eurostat flash inflation for May

On Friday, Eurostat will publish its flash inflation estimate for May. The full effects of Covid-19 containment measures in the Eurozone were on show in April 2020 when annualised inflation stood at 0.3% - down from 0.7% in March and from 1.7% in April 2019. Although Germany partially reopened for business in May, and PMI data across the Eurozone showed an uptick in activity, this is unlikely to compensate for the collapse in the oil price and the closure of restaurants, bars and retail outlets throughout the bulk of the Eurozone.


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