As recently as this week Spanish bond yields had been roiling the markets as they crossed the 7% threshold that is considered the point of no return. With system risk rising anew, the onus was on policy makers to get moving in another attempt to bring down spreads and calm global markets. In the last few days, policy makers have not disappointed on the rhetoric front.
On Wednesday, a member of the European Central Bank, Ewald Nowotny, made comments pertaining to issuing the permanent rescue fund (ESM) a banking license. Many in the analyst community believe that if this step is taken it could be a game changer for the European crises. Yesterday Mario Draghi, the head of the ECB, said “within our mandate, the ECB is willing to do whatever it takes to preserve the Euro. And believe me, it will be enough.” Today there’s speculation that the ECB is preparing to buy Spanish and Italian debt, and the markets are humming on the headlines.
In the short term the jawboning by policy makers is having the intended effect of bringing down bond yields and propelling risk assets up. If these comments are backed up with action, then maybe we’re taking a big step forward in the Euro crises. But before getting too excited, investors should remember that the definition of insanity is doing the same thing over and over and expecting different results. If there’s one thing the Euro crisis has taught us over the past few years, it is that gains on rhetoric with no plan are usually ephemeral. I sincerely hope that Europe is really ready to do “whatever it takes” to end this crisis once and for all. If so, they may unlock a lot of value that has built within European and Emerging equity markets.