At last the Eurozone managed to agree positive steps to help safeguard the common currency, with agreement at the Brussels summit to directly recapitalise Spanish banks, without these funds being counted as sovereign debt . The official statement coming out of the summit stated: “It is imperative to break the vicious circle between banks and sovereigns.”
Whilst politically difficult for German Chancellor, Angela Merkel, she did manage to agree that the European Central Bank (ECB) will have new powers to regulate eurozone banks. These powers represent a first step towards the banking union that Germany had been calling for. At the same time the summit agreed a €120bn growth fund and the start of negotiations for long-term economic and fiscal co-operation.
Under this agreement Spanish banks will be offered €100bn (£80.7bn) in additional funding. These funds will initially be drawn from the European Financial Stability Fund (EFSF) and then from the European Stability Mechanism (ESM), the successor to the EFSF.
Importantly for the global markets, Italian banks will also be eligible for similar support, if needed. The technocratic Prime Minister of Italy, Mario Monti, was quoted as saying: “Italy does not plan to activate the mechanism for now, but I do not exclude anything for the future.”
Again pleasing the bond markets in particular, these bail-out funds will not subordinate existing debt. This had become a major worry to investors in European sovereign debt, and should result in yields dropping from their current unsustainable level. The immediate reaction in the bond markets was to see the yield on the benchmark 10-year Spanish bonds drop to 6.5%. Whilst welcome at below the previous 7% level, this is still an unsustainable rate in the medium term.
No comments:
Post a Comment