The markets didn’t just vote on the Euro summit

By Felix Salmon
December 9, 2011

Am I feeling a bit sheepish about my extreme pessimism of last night, in the wake of a healthy stock-market reaction in both Europe and the US? Not really. Markets did rise, but the movement was within what you might consider standard noise for stock indices these days: roughly 2% in Europe, a little lower in the US. A resounding vote of confidence in the EU this was not: instead, it looks more like the bad deal done in Europe was already priced in, and the markets just continued, today, on their normal volatile and noisy path. In fact, it’s not at all clear that the EU treaty was responsible for any of today’s market move at all.

In the video I shot yesterday with TBI’s Simone Foxman, Simone talks about how Europe’s bailout mechanism is a fragile thing. For one thing, she admits that “the ECB has to get involved in one way or another”, and that we’re not seeing that right now; later on, she wonders whether the markets would even place all that much faith in a German guarantee of PIIGS debts if Germany has been downgraded. “It’s going to be really tricky to not lose a lot of investor confidence” if and when the eurozone breaks up, she says, and when Germany is called upon to provide guarantees, “by then, markets may not trust them enough. If that fear keeps rolling, it snowballs down the mountain and all of sudden becomes an avalanche”.

This is one of those situations where the conventions of reporting market moves on a daily basis are decidedly unhelpful if you want to get a feel for what’s going on in Europe. The fact is that Europe still has a lot of very strong companies, which are worth real money going forwards; in many ways, owning those companies is a much smarter thing to do than simply putting your euros on deposit in a European bank. So looking at the share prices of European companies is really not a great way of working out what the market thinks of the prospects for the future of the eurozone. And looking at the value of the euro doesn’t help much either. Instead, you want to look at more obscure indicators, like the amount that Italian and Spanish banks need to pay if they want to borrow money on the interbank market.

More simply still, just look at the amount of new capital that Banco Santander — one of the strongest banks in Spain, if not Europe as a whole — is now being asked to raise. (More than €15 billion, if you must know.) Here’s Santander’s share price, over the past couple of years. The thing to notice is the inexorable downward slide, not any small uptick today. Does anybody really think we’ve now seen the all-time lows for this indicator? If not, then let’s stop treating intraday market noise as some kind of referendum on the latest Euro treaty.

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