The markets continue to anxiously watch the latest polls from Greece and the headlines from the euro-area in an effort to gauge the odds of a Greek exit from the European Monetary Union, as EU leaders prepare contingency plans for a possible departure by Greece.
Not exactly a surprise given the history of the last couple of years, the EU Summit failed to bring any solutions to the escalating debt crisis and only added to the uncertainty. The French President Francois Hollande proposed the creation of Eurobonds. His call gained the support from most member states of the Euro-zone with the exception of the one that matters the most- Germany, as well as the Netherlands.
Last week reminded the markets once again of the troubles in Spain, where the crisis seems to be deepening. The president of Catalonia, one of the largest regions in Spain, called on the central government for assistance with more funding, while Bankia group said that it will need another 19 billion euro bailout from the government and Standard & Poor's cut the credit ratings of five Spanish banks.
The economic data from the euro-area also failed to instill optimism. The eurozone manufacturing and services sectors contracted for another month, while the German Ifo Economic Sentiment Index saw a bigger than expected drop, raising fears that the largest economy in the Euro-zone may be losing momentum.
Pressures on the euro intensified throughout last week and the single currency registered its biggest losses since December 2011, breaching below the $1.25 mark against the U.S. dollar- the lowest level since July 2010. The euro also fell below 100 yen for the first time since February.
The Vote of the Irish
Following the French and Greek elections, the European political landscape is changing in a way that could become a roadblock to the proper implementation of fiscal compact and austerity measures.
Depending on the outcome of the Irish referendum on the European Fiscal Stability Treaty this week, the euro-area could be faced with yet another roadblock to these measures. Moreover, a decision not to accept the treaty could turn Ireland into another potential candidate for an exit from the European Monetary Union.
On Thursday, May 31, voters in Ireland will decide whether to accept or to reject the EU fiscal treaty. Proponents of a "no" vote say that Ireland will remain in the euro even if the treaty was rejected. But some leaders in Ireland have quickly called such claims "disingenuous" warning that exit from the euro could become inevitable if Irish voters said no to the new EU fiscal rules.
Although recent polls suggest that the majority of Irish and Greek voters are in favor of staying in the euro, the future of the single currency grows more and more uncertain with each and every vote from an electorate unhappy about the lack of balance between austerity and growth.
Promises, Promises
The most recent EU Summit confirmed our observation from the last three years that EU leaders are still incapable of delivering any bold and concrete solutions to a crisis that continues to rattle the financial markets.
On the other hand, we have to admit that we are very impressed by the skills of EU leaders to buy more time by promising new and comprehensive measures at some point in the future, and to kick the can down the road.
In line with the current trend, at their summit last week EU leaders promised more solutions to come at... the next summit. The main EU institutions were given the task to draft "proposals for closer fiscal coordination, including plans for a Europe-wide deposit guarantee scheme". The draft due date is the upcoming EU Summit scheduled on June 28-29.
The EU leaders might feel content with buying extra time for another month, but the likely result will be more uncertainty in the weeks leading to the following important dates.
The leaders of Germany, France, Italy and Spain plan to meet in Rome on June 22, a week ahead of the EU Summit, to discuss the EU debt crisis. The meeting will take place 5 days after the elections in Greece and France on June 17.
Greek voters will go back to the polls for another general election, which some of the latest polls show might bring victory for the far-left Syriza party that is expected to form an anti-bailout program government that could open the door to a Greek exit from the Euro-zone.
France will also hold parliamentary elections on June 17. The newly-elected Socialist president aims to secure a left-wing majority to help him fulfill his election promises, including raising taxes and increasing government spending.
The usual set of newly-proposed ideas and the political deadlock that we witnessed at the latest EU summit, with German-supported austerity and French spending policies at odds with each other, are doing little to reduce anxiety levels.
For the last several years, each and every EU Summit keeps reminding us of the 1980's hit "Promises, Promises" by Naked Eyes. As the song goes, "You made me promises, promises knowing I'd believe. Promises, promises you knew you'd never keep". Sound familiar?
The danger is that after three years of promises, it might not be too much longer before investors run out of patience.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
