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Financial Pacific - Euro, rescue at the knife edge in Karlsruhe (third party)
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Financial Pacific - Euro, rescue at the knife edge in Karlsruhe (third party)

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    Financial Pacific - Euro, rescue at the knife edge in Karlsruhe (third party) Financial Pacific - Euro, rescue at the knife edge in Karlsruhe (third party) Document Transcript

    • Wealth Management Research 6 September 2011The debt crisis Gerit Heinz, analyst, UBS AGEuro-rescue at the knife-edge in Jürg de Spindler, economist, UBS AGKarlsruhe Related publications • "The debt crisis: Eurobonds - today’s resolution, tomorrow’s doom ", 17 August • On September 7, 10 a.m. (CEST) the German Constitutional 2011 Court in Karlsruhe will render the judgement regarding the first • "The debt crisis: Rescuing Italy and contagion bailout package for Greece (May 2010), and the installation of to France", 11 August 2011 the European system for financial stability (EFSM and EFSF). • Our base case assumption is that the Court will refuse the claim of law infringement but set some important guidelines for future aid packages or bailouts, e.g. the necessity of an ordinary parliamentary approval (similar to Finland). • In our risk case the Court would reject the German engagement, what would entail severe consequences for financial markets. In such a scenario, the Euro is likely to depreciate, stock market volatility would increase and spreads for bonds of larger countries like Italy and Spain would widen.The German Constitutional Court will rule on the first of a seriesof motions questioning Germanys previous contribution to theEuropean measures aimed at strengthening the financial stability ofthe Eurozone. Given the general tensions looming on the financialmarkets, the upcoming statement has in our risk case the potential tolead to much more additional volatility. In our base case we assumethat one source of uncertainty may be eliminated at least for a while.Subjects of the claim are mainly a) the first aid package forGreece, which passed the German Bundestag 7th of May 2010 andauthorized the Ministry of Finance to guarantee for loans to Greecein the amount of EUR 22.4 bn and b) the law, which passed theBundestag 21st of May 2010 and enables the Ministry of Finance toguarantee for liabilities incurred by the EFSF up to an amount of EUR147.6 bn EUR. That said the second bailout package for Greece aswell as the future stability mechanism, both agreed on 21st July thisyear, are not subject of the ruling but nevertheless politically stronglylinked with its outcome.The claimIt is the first time the German Constitutional Court will rule onthe constitutionality of the aid package for Greece and the rescuemeasures for the Eurozone. The decisions on the other pending claimsare due at a later stage.This report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 4.
    • The debt crisisThe plaintiffs argue that the measures taken by the German govern-ment and the European Union, including the measures taken by theECB, are violating laws of the Union, i.e. the bailout prohibition ac-cording to article 125 of the treaty of Lisbon and the ban to financethe member states by the central bank. In particular they argue thatthe aid package for Greece and the rescue measures by the EU in-fringe upon the basic right on property (article 14, Grundgesetz) andcurtailing the voting right (article 38 paragraph 1, Grundgesetz), es-pecially under the aspect of a violation of the democratic principlesand the budgetary autonomy of the German Bundestag.Under the circumstances given in May 2010 and the state of emer-gency, the argumentation is that the members of the Bundestag werenot in the position of a free choice. In addition the plaintiffs argue thatsteps towards a transfer union are taken without sufficient legitima-tion by the parliament. They also claim that the German interventionwould finally represent a bailout package for the creditors.A legal case not an economic oneDuring the hearing on the 5th of July the Constitutional Court madeclear that it will decide on legal issues and not on economic ones.Thus the court ruled out to assess the economic value of the rescuemeasures. It will only decide whether actions of the government andthe parliament took place within the boundaries of the Constitution.For the economic aspects we refer our readers to the various publica-tions of Wealth Management Research about the Eurozone and thedebt crisis, particularly "The debt crisis: Eurobonds - today’s resolu-tion, tomorrow’s doom ", published 17 Aug 2011 and "The debt cri-sis: Rescuing Italy and contagion to France" published 11 Aug 2011.A likely but not a done deal – various scenariosIn principle three scenarios are possible with regard to the Courtsruling: • “Yes” - Germanys contributions are not contested at all: The sta- tus quo is prolonged and one source of uncertainty is eliminated, at least for a while. If the plaintiffs intend to appeal against the ruling to the European Court of Justice the uncertainty will come up again but at a later date. • “No” - Germanys contributions are to their full extent contested: The pending debate on the second bailout package for Greece and on the definitive stability mechanism (ESM) become as a po- litical consequence also questioned. An emergency meeting of the European heads of states and government is likely to be con- vened to discuss on ways out of the crisis. Consequences for the financial markets could include a depreciation of the Euro, wider spreads for bonds of the peripheral countries, even France and Belgium, and increased volatility at the stock markets. • “Yes, but” - The past contributions are approved but future pay- ments need the consent of the parliament (our base case): This would correspond to the arrangement already effective in Fin- land, where bailout packages (but not the individual tranches) are to be approved by the parliament through an ordinary procedure. As the Finns already have a critical stance similar to Germany this would probably not change fundamentally the level of uncertain- ty on the market but add another hurdle to future support. If the Wealth Management Research 6 September 2011 2
    • The debt crisis decision is appealed, uncertainty could peak again with the ruling of the European Court.From a political point of view the case of a “Yes, but” ruling could mit-igate criticism from members of parliament, particularly some of thegoverning coalition. Though this is the most likely outcome it couldbe a fragile equilibrium. In case new emergency actions are undertak-en by governments to calm renewed tensions in the eurozone, mostlikely decisions in the parliament will take place under time pressure.Therefore new claims could be in the cards Alt least for now the po-litical consent for further support of Greece remains fragile. In a testvote on Monday too many members of the governing coalition in theBundestag defeated the enlargement of the EFSF or abstained to en-sure a majority of the government. Thus for the parliamentary vote onthe EFSF revision scheduled for the 29 September 2011the coalitioncould be dependent on votes from the opposition, which has alreadyannounced their support .Table 1: Issues with relevance regarding the development of the EurocrisisDate Issue06.09.2011 Start of the parliamentary debate on EFSF revision in Finland06.09.2011 Likely start of the parliamentary debate on EFSF revision in Italy06./07.09.2011 Scheduled parliamentary debate on EFSF revision in France07.09.2011 German Constitutional Court ruling13.09.2011 Likely start of the parliamentary debate on EFSF revision in Spain13.09.2011 Likely start of the parliamentary debate on EFSF revision in the Netherlands15.09.2011 Spanish vote on 2012 budget16./17.09.2011 Ecofin meeting in WroclawMid Sept Details on the provision regarding colleteral deals with Greece29.09.2011 Re-scheduled parliamentary debate on EFSF revision in GermanySep and Dec IMF review of Greek, Portuguese and Irish austerity programMid Oct Italian parliament deadline to vote for the new austerity measures20.11.2011 Spanish electionsSource: UBS WMR Wealth Management Research 6 September 2011 3
    • The debt crisisAppendixGlobal DisclaimerWealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions ofUBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is notintended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein is basedon numerous assumptions. Different assumptions could result in materially different results. Certain services and products are subject to legalrestrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information andopinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty,express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information andopinions as well as any prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinionsexpressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptionsand/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof) may have a long or short position, or deal asprincipal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected withan issuer. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment andidentifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of informationcontained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is consideredrisky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and largefalls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may havean adverse effect on the price, value or income of an investment. We are of necessity unable to take into account the particular investmentobjectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to theimplications (including tax) of investing in any of the products mentioned herein. This document may not be reproduced or copies circulatedwithout prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties forany reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. Thisreport is for distribution only under such circumstances as may be permitted by applicable law.Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliateof UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate whenit distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through aUS-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not beapproved by any securities or investment authority in the United States or elsewhere.Version as per June 2011.© 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved Wealth Management Research 6 September 2011 4