Welcome back, UK readers!
So the weekend that some folk were predicting things would have to get real for the eurozone came and… nothing much happened. Except that Spain really came out and said its banks need help, by which it most definitely did not mean the kind of help that might be construed as a ‘bail-out’. Oh and G7 finance ministers had a chat on the phone and… nothing much happened.
Despite this Spanish sovereign yields have fallen in the past two days, and European indices (with Spain’s Ibex shown in the chart below) are up:
Gary Jenkins, formerly of Evolution and now at his own shop, Swordfish Capital, is baffled:
The idea of a “Banking Union” seems to be gaining ground across Europe. I must admit I do not quite get it. Why Germany and the other strong countries would be prepared to provide almost unconditional support for the entire banking sector is beyond me, may as well go the whole hog and issue common European bonds. The deposit protection scheme part of the plan is one thing but what about bank’s wholesale borrowing? Olli Rehn was quoted as saying that use of the ESM to recap banks was a “serious possibility” and that it was imperative to “break the link between banks and sovereigns.” Right, so instead of a joint Eurozone countries leveraged fund lending to an a European sovereign to on lend to their banks we would have the joint Eurozone countries leveraged fund lending directly to banks. Maybe I am wrong but I still detect a sovereign / bank link there somewhere…
Indeed Spanish 10 year yields have reduced by some 23bps over the last two days whilst the Italian 10 year is down by some 22bps over the same period. I have to admit that I would have thought that Spanish yields would rise when a leading politician says that they need cash but don’t want the stigma of a bailout. Shows what I know.
Ambrose Evans-Pritchard is kind of livid about the rise in European equities:
No, Germany has not agreed to a “banking union”.
It has not agreed to mutualise the costs of bank bail-outs, knowing perfectly well that this means ‘Eurobonds lite’ and the start of a slippery slope towards debt pooling.
It has not cleared the way for use of the EU rescue machinery (EFSF and ESM) for direct recapitalisation of banks – which is what Spain wants to avoid having to bear the contingent liabilities of its crumbling lenders on sovereign shoulders.
The FT says equities investors’ hopes are being raised of central bank easing.
Meanwhile, Martin Wolf says it is quite reasonable to panic now.