The Banking and Strategy Initiative

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European Debt Crisis: The Telling Weekend. Rinse. Lather. Repeat. (Spanish Banks need EUR 100B)

Spain had already agreed to make a request for bailout funds for their banks . This weekend, the formal application will be moved for an amount as large as EUR 100 B according to Fitch. “Unfortunately the Aussie and Japanese Yen are unlikely to give up their new found weakening against the dollar ( at least you would not want to  and the Economic data is good) and that means this bout of the weakening of the Euro will likely take the Dollar Index to new highs above last week’s 83 and commodities will run further South before Imports from the global consumption economies shore up.

European Union

European Union (Photo credit: erjkprunczyk)

However, Europe is used to these crunch bouts and the currency as well as the Economy will continue to treat the events as almost a sidesho. Hoever there could be tremendous upside for improbable causes like a small application or a quick disbursal, which is unlikely to happen in the spirit foa Fiscally united Europe.

The concept of a banking union is unlikely to get a serious ear, though the ECB much works as a Eurosystem of 17 Central Banks. The ease with which the European Union survived May on just a minor decline of the currency and $2 B in Central Bank Swaps from the US is a pointer to those who expected the GRexit to be a Lehman moment or the Spanish disaster that was expected to be the new Lehman moment. Flight of bank deposits from Greece and now the exodus that has begun from Spain also refuse to belittle any respect for the Union. The Continent across the pond is much happier with having separated public finances from the banking system and banking deleveraging is already in its 11th month having begun in August of 2011, yet the Spanish banks will be the second national bailout after Ireland’s banks while Greece repaid all its sovereign debt in the required tranches ith a very professional though harsh haircut of nearly 40%

Spanish yields have already ticked down mid week to below 6% and the 10Y US and Continental yields (Germany) seeming to trade at historical lows are trading much higher than the quoted bonds at 1.6% and 1.4% which is much healthier.  One even expects the German dissent to some in an almost silent hisper though if any front develops on the Banking union or Eurobonds than German acquiesence to a bank bailout , it could be an extended run on the Euro till the expected $1.19 but as of now it looks unlikely. Deals in Europe are down more than a third to $266 B for the year to date and the bullish run in European equities has also halted though they are still down only marginally. Stimulus hopes have much been dashed since the last Jobs report.

The banking union suggests a combined Deposit insurance system for the 17 countries as also centralised bailout funds outside EFSF and ESM that can be disbursed only to governments and as such the issue of Europbonds is very much on the table now. Hoever Germany is likely to ask for some stringent conditions , even tightening the fiscal compact with red ink in a fe places in exchange for the centralisation of the crisis, with a more spread share for all countries of the North and the South


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This entry was posted on June 8, 2012 by in Amitonomics, Banking, European Sovereign Debt crisis, Financial Markets.


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