The summit meeting in Brussels this week has an aggressive agenda and will focus on 3 items:
- IMF backed by a loan from the ECB to purchase Italian and Spanish bonds in the primary market (effectively a political cover for the ECB to keep purchasing sovereign bonds): EUR100 - EUR200
- Fiscal discipline to be embedded in amendments to European treaties. This is effectively a euro-zone "stability union" as prescribed by Germany and France.
- Leveraging of the EFSF x2 or x3 - not clear where the funding will come from
Spain 5yr spread to Germany (Bloomberg)
Much is riding on this summit meeting as the euro-zone bond crisis is starting to make its way into the real economy. Spanish PMI has taken a significant downturn.
In the next 6 months Italy will need to roll $276 bn of bonds and Spain $150 bn. That means should the summit fail to achieve its goals this Friday (and the "track record" isn't great), the sovereign bond sell-off will be rapid and violent. Global equity markets would follow.