German Court Ratifies ESM with Two Conditions

Arthi Gupta
12 Sep, 2012
New York City

The European indexes gained after a German court ratified the European Stability Mechanism. Italy raised

[R]2:30 PM Frankfurt – The European indexes gained after a German court ratified the European Stability Mechanism. Italy raised €12 billion in bond auction at lower borrowing costs. Spanish inflation rose in August and euro area production increased in July.[/R]

European indexes edged higher after the highest and the most respected court in Germany ratified the European Stability Mechanism and attached two conditions.

The ruling will pave the setting up of the fund as early as next month but the ruling opened possibilities of future challenges as German lawmakers retain the ultimate power to increase the size of the fund. Germany is contributing 27% for the rescue fund.

The Netherlands voters go to the polls today to elect a new lower house of parliament and Italy raised €12 billion from 3-month and 12-month T-bills at lower borrowing costs.

German Court Ratifies ESM

Germany''s top court ratified the European Stability Mechanism today but attached two conditions.

The widely expected approval by the highest court in Germany confirmed the legality of the fund but retained the rights of German lawmakers to decide the future increases. The ruling, though welcomed by most economists and bureaucrats, will slowdown the future changes in the bailout fund.

The court said that the bailout fund must limit the German liability to €190 billion and any increase must get parliamentary approval.

In addition, the court also required the bailout fund to consult both the lower and upper houses of the parliament for all confidential decisions.

After the positive outcome from Germany, Eurogroup Chairman Jean-Claude Juncker said that the inaugural meeting of the ESM Board of Governors would be convened on October 8 in Luxembourg.

Separately, the European Commission President Jose Manuel Barroso proposed a single supervisory mechanism for banks in the euro zone and the European Central Bank will have the ultimate authority. The EC set the implementation date at the beginning of 2013.

In Paris trading, the CAC-40 Index gained 10.80 or 0.3% to 3,548.27 and in Frankfurt the DAX Index edged higher 39.86 or 0.6% to 7, 350.15.

The yields on Spain’s benchmark 10-year dropped seven basis points to 5.62%. Italian 10-year yields fell three basis points to 5.05%.

Italian Bond Auction

Italy raised €12 billion from 3-month and 12-month T-bills at lower borrowing costs.

The average yield on 3-month bills fell to 0.7% from 0.865% at the prior auction in May. The bid-to-cover ratio was at 2.25.

The average yield on the 12-month bills dropped to 1.692% compared to 2.767% in August. The bid-to-cover ratio was 1.65 compared to 1.69 in the previous auction on August 13.

Euro Zone Output Increases

Industrial production in the euro area increased 0.6% on a monthly basis in July, from the 0.6% fall in June, data released by statistics office Eurostat showed.

In EU27, production increased 1.1% in July compared to June and annually declined 1.5%.

Annually, industrial production declined 2.3% in July compared to the 2.1% fall in June, revised down from 2.2%.

French Inflation Rises

French annual consumer price inflation rose to 2.1% in August from 1.9% in July, according to the statistics office Insee. Energy prices contributed the most to the total inflation increase.

From a month ago, the index gained 0.7% in August, from the 0.4% decline in July.

German Inflation Climbs

Germany''s consumer price index climbed 2.1% annually in August, from 1.7% in July, final data released by the Federal Statistics Office showed today.

Energy prices were up 7.6% and food prices increased 3.3% compared with August 2011.

On a monthly basis, the consumer price index increased 0.4% in August.

Spanish Inflation Up

Spain''s annual consumer price inflation rose to 2.7% in August from 2.2% in July, data released by statistics office INE showed. The latest inflation rate was the highest since November 2011, when consumer prices rose 2.9%.

Food and non-alcoholic beverages prices rose 2% annually.

On a monthly basis, consumer prices rose 0.6% in August, from the 0.2% fall in July.

UK Jobless Claims Drop

The unemployment claims in the UK dropped 15,000 in August from the prior month to 1.57 million, according to the Office for National Statistics.

The seasonally adjusted rate was 4.8% in August, unchanged from July.

The unemployment rate for people aged 16 and over was 8.1% for the three months to July.

Total public sector employment decreased in the second quarter by 235,000 to 5.66 million and private sector employment increased by an estimated 471,000 to 23.9 million.

Gainers & Losers

ABB Ltd. rose 0.4% to Sfr17.85 and the power and automation technologies provider reiterated its plan to grow service revenues to as much as 25% of total sales by 2015.

Fraport AG soared 4% to €46.67 after the air transportation hub operator processed nearly 5.6 million passengers at its Frankfurt Airport home base in August, an increase of 245,000 passengers compared to a year ago month.

Glencore International plc dipped 0.4% to 362.95 pence after the commodities trader yesterday confirmed that its revised offer for Xstrata is final. Qatar based sovereign fund has sought higher price and said it will vote against the merger before the latest revision.

Kingfisher Plc climbed 1.5% to 276.4 pence after the home improvement retailer reported first-half sales dropped 3.3% to £5.48 billion. Profit before tax for the period declined 16.9% to £364 million.