Week in Review (21 June)

Indecision at European Council over Commission Presidency

The 20 June European Council broke up not only without agreement on the identity of the new Commission Presidency, but also without a clear path toward compromise.

Following the 20 June Council, Emmanuel Macron said that the Spitzenkandidat process as a whole was dead. As well as ruling Manfred Weber out, this would also end the interest of Frans Timmermans and Margrethe Vestager. This version of events was contradicted by Angela Merkel, who said that while there had not been sufficient agreement on any one candidate, that could still change. The Council is now set to reconvene on 30 June for a special jobs summit.

As we have noted before, the selection process is caught up with domestic considerations to an unprecedented degree. This is in large part due to Mario Draghi’s term as ECB President coming to an end later in the year, and concerns on how this could affect the ECB Monetary support which has helped to supress bond yields – particularly in south European countries. Italy in particular is anxious to prevent Germany’s Jens Weidmann from succeeding Draghi.

Draghi doubles down on accommodative message

In our 14 June report we noted an apparently concerted campaign by the ECB to emphasise the dovish message given by Mario Draghi following the last GC meeting. This messaging campaign stepped up a gear – and became more effective – in the course of the last week when Draghi himself used his speech at the ECB Forum on Central Banking in Sintra, nominally on the topic of ‘Twenty Years of the ECB’s Monetary Policy’ to double down on the dovish message and also to suggest that tweaks to the ECB tools could be possible if deemed necessary. This could, for example, involve the tweaking of limits on ECB sovereign bond holdings.

Draghi is understood to have reiterated his dovish message in a speech to Member State leaders at the EU Council. We think it unlikely that in his remaining months in the job Draghi will himself be able to oversee further substantial easing measures. We believe, however, that the tone adopted by Draghi and others is an attempt to direct the policy approach of his successor.

Investors expect rewards to help Greek banks along incremental path to normality

H1 2019 has seen the first Greek NPE securitisation transaction with a public rating and, as of yesterday, the first Greek bank issue a subordinated Tier 2 instrument since 2008 with 135 institutional investors participating. Nevertheless, investor caution was well demonstrated by the fact that the issuance had a a yield of 9.75%. Earlier this year, Unicredit and UBI Banca issued Tier 2 debt at an interest rate closer to 5%.