European market wrap

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Australian Broadcasting Corporation

Broadcast: 18/08/2011

Reporter: Ticky Fullerton

Tom Vosa from the National Australia Bank in London dissects what the French/German discussions on the Eurozone actually delivered.


TICKY FULLERTON, PRESENTER: In Europe, stock markets are heading south tonight as investors fret about the German-French grandstanding earlier in the week that delivered, well, what?

I'm joined now from London by Tom Vosa, National Australia Bank's head of market economics in Europe.

Tom, welcome to the program.


TICKY FULLERTON: Now, chancellor Merkel and president Sarkozy: no Euro bonds, no fiscal union, no boost to the stability fund, no change in the ECP's mandate. I'm surprised the markets didn't react more negatively.

TOM VOSA: Well, clearly the biggest shock was the imposition of all the - imposition of a financial transactions tax. They hope to write to the European Commission and have something by the end of 2012.

Now this could either be the so-called Tobin tax, which is a percentage tax on FX turnover, or it could be something even bigger, which the EU Commission have always seen as perhaps something that it could use for centrally funding itself.

TICKY FULLERTON: It just seemed to upset people.

TOM VOSA: Yeah, well, stocks are off 3 per cent and financials are leading it. I think partly it's just the whole vagueness of this.

There were five things: we had the transactions tax, governments going to meet twice-yearly, the stability and growth pact has to be hard-wired into constitutions, and of course corporation tax now has to be consolidated throughout the Eurozone.

Now, the Irish aren't going to go for that. Certainly they'll wait until the British government say yes, which will never happen. So, really, we're going to re-open some of the old wounds of Europe, which we had thought we'd closed.

TICKY FULLERTON: And the British, I understand, will veto the financial transactions tax.

TOM VOSA: Indeed. They already have the bank levy, so therefore the government sees it as not needed, and at a G20 level and for any transactions tax, you're going to need the agreement of the Americans and the Asians to stop business from flowing elsewhere.

That again was vetoed. So, really, lots of proposals, but nothing much that we think going forward will become concrete.

TICKY FULLERTON: And Austria and Finland seem upset as well, so what is the next signal that the market will then test because we've got the Central Bank holding the line for now, purchasing, what? $20 billion Euros of Spanish and Italian bonds each week? At what point is the market going to brace?

TOM VOSA: Well, I think the key point for now is that we need to get the EFSF - the European Financial Stability Fund - implemented by the end of September, which was of the first pledges of the Sarkozy-Merkel letter.

Now certainly they are - Merkel's really having a meeting this week in - with her party to try and get it passed early, but we have issues there. For example, the Finns have demanded collateral from Greece against any lending that they give to them during the fund. The Austrians are now complaining that if the Finns get collateral, then they want some as well, so we could have European governments falling over who owns exactly which Greek islands as security against their lending.

Other trigger: European bank funding. We have seen now lots of tensions in money markets. If we look at the Euro swap rate, which is the rate at which European banks get US dollar funding, it's at its lowest rate since Lehmanns collapsed, so there's clearly a massive premium now for getting dollars. And we had one bank yesterday borrowing from the ECB about $500 million because it couldn't get it from the private sector.

TICKY FULLERTON: And that has caused a lot of concern in the US already with the Federal Reserve watching banks in Britain now.

TOM VOSA: Absolutely. You would say in Europe, the bank stocks are falling, there's this transactions tax. If you're looking at US banks, which again are still perhaps a little bit fragile, you're going to be saying, "Why aren't you lending to European banks which could need to get more capital quickly?"

We are seeing international money markets jam up. Libel rates haven't risen in the same rate that they did in 2008-2009, but markets are still very tight.

TICKY FULLERTON: Briefly, I gather the tenure bond in the UK is in record territory.

TOM VOSA: Indeed. We're either at an 1896 or 1897 low. I think the UK benefits as a safe haven. If you're uncharitable enough to think of the Eurozone as a glue factory, the UK is definitely the best horse at the moment.

TICKY FULLERTON: Tom Vosa, thank you very much for joining us from London.

TOM VOSA: Thank you.

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