AFTER yesterday announcing a 5.5 per cent higher $4.5 billion profit for the nine months to June, ANZ chief executive Mike Smith said – as others have said in this profit reporting season – that he isn’t running the business on the assumption that subdued trading conditions will soon end.
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Even if Europe comes up with a plan to resolve its sovereign debt crisis, the world is in a ”multi-year debt workout,” Smith says. The short-term outlook for Europe is, however, crucial and there are four deadlines looming: next Friday, September 6, September 12, and October 8.

September 6 is a big one. It’s the day the markets want European Central Bank president Mario Draghi to definitively explain his July 26 promise to ”do whatever it takes to preserve the euro”.

The ECB met a week after he spoke, and Draghi announced that the central bank was considering ”outright open market operations” in sovereign bond markets.

The bank would address concerns of private sector bond owners in the process, and the European Union needed to be prepared to activate its own bailout funds, he said, but only with ”strict and effective conditionality”.

What Draghi is believed to be planning is a two-pronged defence of the euro that will focus on Spain and Italy, the two nations most in danger of a debt-market meltdown.

The ECB will step into the markets and begin buying sovereign bonds that Spain and Italy have already issued, focusing on shorter-term paper where its buying gets the most traction. The EU will separately buy new longer term bonds from Spain and Italy – but only if they agree to tighter EU fiscal controls.

Draghi said on August 2 that the buying would be ”of a size adequate to reach its objective”. That objective is a sustained rise in Spanish and Italian bond prices and a proportional fall in bond yields and borrowing costs.

Draghi wants to eliminate a ”convertibility discount” in Spanish and Italian bond prices that reflects fears that the two nations will fall out of the euro system.

He also wants to convince private sector bondholders that ECB buying will not turn them into second-class creditors, as Greek private sector bondholders became in February when they agreed to a 53 per cent bond write-down and the ECB did not, on the grounds that it could not directly finance the stricken nation. If they are confident they will rank equally with the ECB they will be less likely to undermine the ECB buying by selling into it.

Draghi’s August 2 comment that the ECB would ”design the appropriate modalities” of the plan in coming weeks puts the ECB’s September 6 meeting in the spotlight. He has to provide more details at that time to maintain his momentum and the global market rally his comments triggered.

The European Union’s part in the plan will, however, be in suspense until September 12, when Germany’s Constitutional Court decides whether to grant an application by 12,000 German citizens for a temporary injunction against German laws that help create Europe’s new €700 billion ($A820 billion) bailout fund, the European Stability Mechanism. The ESM must be approved by EU nations that account for 90 per cent of its capital base: Germany’s funding share is 27 per cent, so its agreement is essential.

An injunction would not be instantly fatal to the emerging plan. The court would need to make a final decision about whether Germany’s participation in the ESM is constitutional, and a temporary fund the ESM is designed to replace, the European Financial Stability Facility, is still alive. It would, however, further delay the ESM, which was originally intended to debut last month, and the temporary EFSF has much less firepower than the ESM after spending more than half its €440 billion kitty on other bailouts.

Greece’s crisis is also still not contained. Its economic output in the June quarter was 6.2 per cent lower than a year earlier, and unemployment is running at 23 per cent. There’s a real question about whether budget cuts it agreed to in February in return for a second, €130 billion bailout are the right medicine – and no doubt in any event that the coalition government Greece elected in June will be unable to deliver the first tranche of cuts in time for a planned €31 billion injection of bailout money needed to keep the lights on.

Germany is taking a hard line as usual in public, and insisting that Greece must deliver cuts on time to get its money. The Greek government wants a two-year extension for the entire program.

Representatives of the bailout troika – the EU, the European Central Bank and the International Monetary Fund – have been conducting a stocktake, and are due to report back to the EU on October 8. Market anxiety will ramp up as that date approaches if there are no signs of a compromise, because if the Greek bailout is derailed an old, dangerous scenario reappears: a third bailout will need to be negotiated, with all its complications, or Greece will default and exit the euro, with potentially calamitous repercussions in the Spanish and Italian bond markets.

The final piece of the puzzle is Spain’s banking system. The EU has agreed to inject €100 billion into Spain’s banks without tipping Spain into a full bailout, and Spain’s parliament meets on Friday to vote on the deal and its attached conditions, including the creation of a new ”bad bank” that will harvest bank debts that have gone wrong. The biggest casualty of Spain’s property market collapse, Bankia, is waiting for a €19 billion injection, and needs it soon.

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