UBS daily guide Asia // A fateful day for the Eurozone // In short, a delay of the ESM could cause peripheral Eurozone bond yields to rise again.

UBS daily guide Asia
Hartmut Issel
Analyst, UBS AG
Chin Keong Tan
Analyst, UBS AG

A fateful day for the Eurozone

With no Federal Reserve decision until Friday, all eyes will be on
Germany and the Netherlands today. The German constitutional
court will deliver its verdict on the legality of the European Stability
Mechanism (ESM) bailout fund. At issue is whether the vehicle
unduly cedes sovereignty and thus requires a referendum. Most
observers expect no objection though some conditions may be
attached to the verdict. In the unlikely scenario of a strike down,
markets will react negatively, though that would not mean the end
of euro rescue attempts. The ESM's predecessor, the European
Financial Stability Fund, remains in place until mid-2013 and a new
ESM deal can be struck, though this could take a while as the 17
parliaments would have to ratify again. The European Central Bank
has explicitly said its unlimited bond-buying program applies only to
countries that have turned to the ESM and thus accepted reform
conditions. In short, a delay of the ESM could cause peripheral
Eurozone bond yields to rise again.