A Good Slippery Slope

“Sometimes a slippery slope is a good thing”, wrote former trader Richard Breslow on Tuesday. “Without it, there could have been real long-term trouble”.

He was, of course, referring to the EU recovery fund and the deal agreed in Brussels. As tipped Monday, the final agreement calls for the disbursement of €390 billion in grants and €360 billion of low-interest loans.

Angela Merkel who, together with Emmanuel Macron, unveiled her plan for an ambitious, jointly guaranteed rescue fund in May, described herself as “very relieved”. “We have come up with a response to the biggest crisis the EU has faced”, she added.

The deal marks a pivotal moment in European history — fiscal burden sharing is now a reality. And this is a genie that likely won’t go quietly should anyone attempt to put it back in the bottle.

Dutch Prime Minister Mark Rutte — who made a show of obstinance in a bid to cement his frugal bonafides — struck a diplomatic tone. “Occasionally we can collide, but everybody can handle that, we are all professionals”, he said, shrugging off the acrimony that characterized weekend talks.

Contrast that with Washington D.C. You will never — ever — hear anything conciliatory out of either side after a partisan fight. Likely because US politicians are not, on any sane interpretation of the word, “professionals”.

“The deal was notable for its firsts: European countries will raise large sums by selling bonds collectively, rather than individually; and much of that money will be handed out to member nations hit hardest by the pandemic as grants that do not have to be repaid, and not as loans that would swell their national debts”, The New York Times writes, summarizing things in layman’s terms. “Those extraordinary steps reflected a difficult consensus among members: that the scale of the crisis facing them required groundbreaking measures to ensure the bloc’s legitimacy, stability and prosperity”.

Macron was proud of himself and also of his counterparts across the continent. “We are 27 around the table and we managed together to produce a budget”, he remarked, during a joint presser with Merkel. “In which other political sphere in the world is that possible, is that done?”, he wondered, marveling at the sheer ambition of what he managed to goad everyone into.

“Europe has shown it is able to break new ground in a special situation. Exceptional situations require exceptional measures”, Merkel said, celebrating another achievement in the career of one of the post-War era’s most accomplished politicians.

Germany, Denmark, the Netherlands, Sweden, and Austria did secure rebates, which could cut their net buy-in by some €50 billion over seven years. Apparently, when you combine the portion of the €750 billion earmarked for green initiatives with the bloc’s seven-year budget, you end up with the largest green stimulus plan the world has ever known. Literally. Every euro spent must be generally in keeping with the Paris Agreement, which Donald Trump abandoned.

“Rubicon crossed permanently, or temporarily?”, SocGen’s Kit Juckes asked. “A large-scale, centrally-financed fiscal endeavor clearly represents a major step forward for the EU [and] the details of the package are less important than the message”, he went on to say, adding that he still has concerns, namely that “it took so much pain to do, and the fear that this is merely a one-off, temporary move to a better structure that won’t be repeated until something else [like] COVID-19 turns up”.

Naturally, this increases the appeal of the euro in the longer-run, even if there’s a “sell the news” dynamic in the near-term. It is, potentially, a de-dollarization catalyst.

The vehicle creates “a massive new pool of high-quality, euro-denominated bonds that could be used by foreign investors to diversify away from Treasurys and the dollar”, Credit Agricole’s Valentin Marinov said.

And yet, some suggested it’s already time to take profits on positions that have benefited from the rally. Commerzbank, for example, said Italian debt may soon get exhausted. The BTP-bund spread compressed to ~150bps on Tuesday.

“The bullish tightening suggests that the low vol, long carry backdrop has legs, but the air is getting thinner for BTPs”, Commerzbank warned. German equities turned positive on the year (lower pane).

The Times also notes how unusual it was that Merkel, “put her finger on the scale on behalf of hard-hit southern countries and did battle with the nations she once championed”. Italy will receive some €80 billion in grants under the deal.

The chancellor lauded European leaders for their efforts. “This very special construct of 27 countries of different backgrounds is actually able to act together, and it has proven it”.

Rabobank’s Michael Every had some characteristically amusing color to offer. “Europe found a way out of its multi-day mega-summit, which must have come as a physical relief to the leaders involved and the journalists having to sit there and cover it”, he wrote Tuesday. “Critics will continue to point out that this isn’t enough to really jump-start a recovery given the damage done — but it’s certainly not the cold hard nothing that was on the cards at one point”.


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