Just a very short note today.
The news that EZ banks would be recapitalised directly by the bail out funds, once a single EZ banking supervisor was put in place (by the year end?) and dropping the seniority status on EZ funds to Spanish banks, is good news. The EZ leaders also suggested that the EFSF/ESM will be used “in a flexible and efficient manner in order to stabilise markets for Member States” ie buying peripheral debt, is further good news. The ECB has agreed to act as agent in this regard. Having said that the firepower of the EFSF/ESM is insufficient and the ESM will have to be granted a banking licence, given (very likely) demands from EZ countries.
There was no movement on Euro bonds and/or a bank deposit guarantee scheme or a bond redemption fund. However, the news, overall, is favourable as I take this as a positive and meaningful step towards fiscal union, leading to political union. France remains the key.
The really good news is for Ireland. The statement that the EZ would “examine the situation of the Irish financial sector with a view of further improving the sustainability of the well-performing adjustment programme”. If this means what I think it means, it suggests that the ESM would provide capital to Irish banks directly, reducing Ireland’s debt to GDP and, in addition, could involve a restructuring of the infamous promissory notes. The impact will be that Irish debt to GDP will decline by many 10’s of percentage points, probably enabling the country to access international capital markets in due course.
Peripheral bond yields are declining materially and (good news) German bund yields are rising. As expectations were close to zero, this news is positive. However, markets are deeply suspicious, as previous bounces have faded in a matter of hours. However, personally I take the announcements early this morning much more positively. Indeed, it may be time to start looking at Europe.
The really positive news (assuming cooperation by France) is that the EZ is moving towards a fiscal, banking and political union far faster that commentators think – certainly not the 5 to 10 years most people are predicting. I believe that you will have to have major announcements within one to two years. Yes, you always have to be deeply suspicious of the EZ, but this announcement is progress. I’m getting more positive.
The Euro is bouncing today and may well have further to go. However, I remain bearish, except in the very short term. Next week, the ECB meets – I believe a rate cut of at least 25bps (possibly even 50bps) will be delivered.
29th June 2012