Search This Blog

June 30, 2012

Euro 'breakthrough' is tenuous

NEW YORK (CNNMoney) -- Euro area leaders agreed early Friday on a number of steps designed to stabilize eurozone credit markets and strengthen the region's banking system.


After a late-night round of talks in Brussels, the leaders agreed to move towards more centralized banking regulations and use bailout funds more liberally to support eurozone governments in the bond market.

The leaders hailed the agreement as a "breakthrough," but many of the details have yet to be finalized and implementing the plans could prove politically and legally difficult.

"These steps are the obvious ones to take to try and restore some confidence in the market in the short term," said Gary Jenkins, analyst at Swordfish Research.

"Alone they do not solve the underlying problems but they might buy a bit of time which is probably about the best they can do right now." Investors, who had been bracing for a more disappointing outcome, welcomed the agreement.

Stocks in Europe and the United States gained more than 1%.Yields on Spanish 10-year bonds fell to 6.4%, down from highs above 7% last week. Italian bond yields also eased, with the 10-year falling to 5.8%.

"I know that many people were skeptical about the prospects for this summit," said Jose Barosso, president of the European Commission.

"And I hope that they were pleasantly surprised when they heard the news this morning."

The moves announced Friday are aimed squarely at Spain, while Italy stands to benefit to a lesser degree. The leaders agreed to inject bailout funds directly into Spanish banks, rather than lending money to the Spanish government, which would drive up Madrid's debt load.

They also decided to withdraw the preferred creditor status of the European Stability Mechanism, the bailout fund that will finance the recapitalization of Spanish banks.

This had been a major concern for investors, who worried that private bondholders would be ranked second in any restructuring of Spanish government debt.

The leaders said they will use bailout funds "in a flexible and efficient manner in order to stabilize markets" for euro area nations that are undertaking economic reforms.

The move is designed to restore confidence in the debt market, where Spain and Italy have been struggling to maintain credibility.

But analysts say the bailout funds may not have the resources necessary to fully backstop the market for the third and second-largest euro area economies.

The ESM, along with the European Financial Stability Facility, have about €500 billion between them, said Chris Scicluna, Chris Scicluna, head of economic research at Daiwa Capital Markets, in a note to clients.

In contrast, Italy and Spain have about €2 trillion in debt needs, he added.

"There is still not a credible or effective backstop in place for the two sovereign bond markets that matter most to the future of the eurozone," said Nicholas Spiro, director of London-based consultancy Spiro Sovereign Strategy.

The leaders said they will consider proposals to establish a single banking supervisor for the euro area, involving the European Central Bank, by the end of 2012.

The move is a step towards the formation of a so-called banking union, but the leaders did not say anything specific on other key aspects, such as common deposit insurance and a mechanism to resolve failed banks.

The goal is to break the "negative feed-back loop" between banks and governments. In Spain, for example, domestic banks have been the main buyers of Spanish government debt.

That means a bailout of the government would drag down the banks, and vice versa.

However, analysts say the creation of a centralized banking authority would mean a significant loss of sovereignty that many euro area nations may be unwilling to accept.

cnn.com

No comments:

Post a Comment