Last Friday, after the 19th European emergency summit, markets rallied on the idea that the 19th time might be the charm, and Europe might finally be awakening to the gravity of the current situation. Spreads on Spanish and Italian bonds came in handily, and equity markets around the globe rallied furiously after European leaders pulled an all-nighter on Thursday to try to come to some conclusion on how to stem the crises.
Here are some of the take-aways:
- One of the main phrases in the statement was that the officials “affirm that it is imperative to break the vicious circle of banks and sovereigns,” which gives the impression that Europe is firmly committed to doing what it takes to protect the banking system.
- An agreement was made to create a single banking supervisor for Eurozone banks, and while the ESM was not granted a banking license, many viewed this as a positive step towards European banking unification.
- It was decided that European rescue funds (EFSF/ESM) will be “used in a flexible and efficient manner in order to stabilize markets” and officials said the funds can buy sovereign bonds on the primary and secondary markets.
While some good things were said, it’s important to remember that there is a reason that we’ve had 18 of these prior, and will likely have our 20th sometime in the near future. The statement was long on good intentions, and short on details. I was disappointed it did not address the idea of European deposit insurance, which may ultimately be required to stop the soft bank runs that are occurring on the European periphery.
While equity markets have held most of their post-summit gains, it’s notable that bond spreads in Spain and Italy are climbing rapidly again, and the Euro currency is back to pre-summit levels. I don’t want to completely discount this latest summit or statement, and I do think it’s important that policy makers continue to show that they’ll act when markets push them to the brink. But like everything associated with this frustrating crisis, the current message from the sovereign debt markets is that the latest summit was one step forward and two steps back.
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