PresseKat - DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the lines

(firmenpresse) - DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking /
Schlagwort(e): Sonstiges
Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the
lines - Bernhard Eschweiler

29.06.2012 / 15:13

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- Euro leaders agree on a vague vision for a tighter union but not on a
road map

- Merkel gets her way without giving much

- ECB provides glue to keep Euro together and is likely to apply more

- Market pessimism impacts business sentiment - 2011 déjà-vu?

Financial markets continue to oscillate between hope and disappointment.
The outcome of the Greek election, although widely viewed as Euro friendly,
had little impact on sentiment. The G20 summit produced empty statements
and the agreement by France, Germany, Italy and Spain on a EUR130 billion
growth package contained nothing new to get markets exited. Nevertheless,
markets have not given up hope that something positive may come out of the
EU summit today and tomorrow. Don't get excited. Yes, some commitment to
a fiscal and banking union is likely to emerge, but the differences over
the road map remain too large at the moment. The likely result: more
muddling through. Indeed, expecting more would be naïve. While
frustrating, however, this process is not necessarily doomed. Critical is
the role of the ECB, which is likely to do more to keep the Euro on track.

Completing monetary union in small steps

The recognition, that monetary union requires a closer fiscal union as well
as a banking union, is gaining weight. Most likely, the closing statement
of the current EU summit will outline a vision of fiscal and banking union.
Moving from that vision to a road map and concrete measures, however, will
remain a process of small steps. Too large are the differences, especially

between Germany and France. As we wrote before, asking German tax payers
to transfer funds without retaining some control is politically not
feasible. On the other hand, Germany is sufficiently committed to the Euro
and the periphery so dependent on Germany that acute stress is likely to
lead to step-by-step compromises. The box above outlines where compromise
is likely or possible.

Already announced or widely anticipated are the growth package, the Spanish
bank recapitalization program, a rescue package for Cyprus and the
supervision of the largest banks. Likely is also a stretching of fiscal
targets. Greece will struggle to get much relief from the Troika, but
countries like Spain, that comply with the fiscal requirements yet miss
their targets due to poor economic conditions, can expect more sympathy.
Open is whether fiscal targets will be officially stretched or deviations
just tolerated. Unlikely at this moment are any measures to mutualize
liabilities. For that to happen, Germany and its allies will require more
democratic fiscal control at a pan-European level, which most other
countries led by France are currently not willing to accept.

Possible are measures that increase the emergency-response capabilities of
EFSF and ESM. Formally, EFSF and ESM have the option to intervene in the
government bond market. However, Germany has not yet given the final green
light. That could be an outcome of the summit. Related is the issueof
EFSF/ESM resources (bank license or funding increase). A decision is
unlikely at this summit, but the issue will remain on the agenda,
especially if the Euro comes under more pressure.

ECB at center stage

Critics argue that this muddling through is not sustainable as it fails to
build market confidence. To be sure, that is a risk, but not an inevitable
outcome. First, Ireland and Portugal are good examples that sticking to
reforms can build market confidence over time. Both countries have seen
sovereign spreads narrowing. In the case of Ireland, the Target2 balances
also show that capital is coming back into the banking system. Second,
there is the ECB that plays an underappreciated role in keeping the system
together. While sovereign spreads for Italy and Spain have widened again,
Euro interbank spreads have remained low. Last week's easing of collateral
standards was another small step in the ECB's efforts to keep the banking
system afloat.

The market is increasingly anticipating an ECB rate cut at the council
meeting next week. From an economic perspective, the ECB can justify a
rate cut with weaker economic performance, falling inflation and stagnant
bank credit. To be sure, cutting rates will have little direct impact on
economic growth. However, lowering funding costs will have a substantial
impact on the financial position of the banking system, given how much
banks now depend on ECB liquidity. Thus, we expect that the ECB will lower
the policy rate in two steps in the third quarter to 0.5%. Less likely is
a near-term reactivation of the SMP. For the ECB, the SMP is a temporary
emergency tool. Using the SMP more proactively would provoke German
protest, which ECB president Draghi is trying to avoid as long as possible.

German business expectations vs. conditions

Last week's IFO survey showed that Germany is not immune from the Euro
crisis. The expectations component dropped notably and is back to the low
of last October. Current conditions, however, improved modestly and remain
in expansion territory. The question is whether current conditions will
follow expectations downward or whether current conditions will hold up and
expectations eventually improve as was the case last year. We think the
latter. The improvement of expectations at the end of last year was
triggered by better global economic conditions, notably the recovery in the
US. We are optimistic that the US will not spiral into recession, but see
the bigger potential for positive news

coming from China, which is accelerating its stimulus program. In
addition, we believe that German domestic demand will prove resilient.
Thus, the better-than-expected consumer confidence survey was good news.
But even more support is likely to come from residential construction.

Disclaimer

This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 29 June 2012, Silvia Quandt Research GmbH,
Grüneburgweg 18, 60322 Frankfurt is responsible for its preparation. German
Regulatory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht
(BaFin), Graurheindorfer Str. 108, 53117 Bonn and Lurgiallee 12, 60439
Frankfurt.

Publication according to article 5 (4) no. 3 of the German Regulation
concerning the analysis of financial instruments (Finanzanalyseverordnung):

Number of recommendations Thereof recommendations for issuers to which
from Silvia Quandt Research investment banking services were provided
during
GmbH in 2012 the preceding twelve months
Buys: 92 37
Neutral: 49 6
Avoid: 17 0

Company disclosures

Article 34b of the German Securities Trading Act (Wertpapierhandelsgesetz)
in combination with the German regulation concerning the analysis of
financial instruments (Finanzanalyseverordnung) requires an enterprise
preparing a securities analysis to point out possible conflicts of interest
with respect to the company or companies that are the subject of the
analysis. A conflict of interest is presumed to exist,in particular, if an
enterprise preparing a security analysis:

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analysed;

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(e) is party to an agreement with the company or companies that is the
subject of the analysis relating to the production of the recommendation;

(f) or the analyst covering the issue has other significant financial
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In this respective analysis the following of the above-mentioned conflicts
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Frankfurt am Main, 29.06.2012

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Ende der Corporate News

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29.06.2012 Veröffentlichung einer Corporate News/Finanznachricht,übermittelt durch die DGAP - ein Unternehmen der EquityStory AG.
Für den Inhalt der Mitteilung ist der Emittent / Herausgeber
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176043 29.06.2012