Someone said to me last night that “there is no such thing as
hopeless situations, just hopeless people in situations”. The great and the
good of the European political class have done it again and, after having the
table set for them by an ECB seemingly greedy for balance sheet risk, they’ve
come to nothing. The leaders have failed to agree to change the EU treaty so as
to guarantee tighter fiscal control over EU members and instead we will see a
watered-down agreement launched with great fanfare and very little spine. It
seems that David Cameron was the main stumbling block in negotiations for
bigger concessions for the UK financial industry. Some commentators have
suggested that this means the UK is dead to Europe and that our influence in
shaping the continent in the future will be on a similar line to that of Malta
or Latvia. Cameron however has done nothing more than what other EU leaders
have done throughout the crisis; obfuscate for regional differences. Blaming
him is unfair, the whole show is a farce.

Some good news has come of this summit; the IMF has managed to
increase its funding by $200bn however, the main items
that needed a decision on its funding; the European Financial Stability Fund
and the European Stability Mechanism were left by the wayside. Negotiations
will be picked up in couple of hours’ time and a decision is needed by Sunday
night or all hell will break loose.

It was all looking great when Mario Draghi was speaking from his
podium at the ECB after they decided to cut rates by 25bps. That was always
going to happen, the key has always been the press conference. The ECB extended
the LTRO program and banks can now borrow for up to 3 years from the ECB as
opposed to 13 months previously. As we said in yesterday’s morning update this
should allow banks’ balance sheets to become stronger (as they transfer risk to
the ECB) and bring inter-bank funding back to a sensible level. The ECB also
eased collateral rules so banks can use other assets to obtain funding. They
used to have to submit AAA debt but now it can be almost anything (bonds,
blue-chip equities, maybe even art).

These are both bullish but the rattle lower yesterday afternoon
has come from another comment from Draghi that “he didn’t signal more bond
purchases last week” and therefore we may not see further support for sovereigns.
The new injection of IMF cash is not solely for the Eurozone (it must be used
globally) but I wonder how much of it will end up around the Mediterranean. A
summit judgement is inappropriate at the moment given it is still going on but
much like many dons urged me, they “must try harder”.

Outside of Brussels we have seen the ratings agency, Moody’s
downgrade the debt of BNP Paribas, Societe Generale and Credit Agricole,
stating their “creditworthiness was being hurt by the fragile operating
environment for European banks”.

Needless to say the day’s trade will be dominated by rumour and
counter-rumour from Europe and we would advise all clients that,
if they see a price that fits their budgets, to execute as Lord knows where
this is going. Hope is an ineffective hedge.

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