After some perplexingly negative initial market reaction to the Draghi gambit everything turned around. European stocks leapt nearly 2.5 percent yesterday and Asian shares are set to bank their biggest daily gain in six weeks. Italian and Spanish borrowing costs have fallen markedly.
Sometimes, a week away from the fray can bring perspective. Sometimes, you miss all hell breaking loose.
My last day in the office saw European Central Bank President Mario Draghi utter his “we will do whatever it takes” to save the euro declaration. The markets took off on that, only to sag when the ECB didn’t follow through at last Thursday’s policy meeting.
Markets were a little unnerved yesterday by concern that Germany’s top court may take a long time to rule on complaints lodged against the euro zone’s permanent bailout fund, the ESM, which was supposed to come into effect this week. Finance Minister Schaeuble urged the constitutional court to reach a speedy decision. The judges are not expected to block it but Germany’s president says he won’t sign it into law without the court’s go-ahead. A minor delay will pose no problem. A lengthier one could jolt investors.
Euro zone finance ministers meet later today to try and put flesh on the bones of the EU summit agreement 10 days ago. The trouble is there probably won’t be enough meat for markets which failed to rally significantly after the summit deal and are now unnerved by fresh signs of global slowdown.
Friday’s weak U.S. jobs report is the latest evidence to rattle investors so there is unlikely to be any let-up.
With Spanish Prime Minister Mariano Rajoy calling for a new euro zone fiscal authority to manage the bloc’s finances and send markets a signal that EU leaders mean business about defending the euro, it is clear that the push towards fiscal union, led by Germany, is gathering momentum. Germany has also conceded that Spain should get an extra year to make the spending cuts demanded of it, suggesting it is aware that the crisis is lapping at its door again.
Spain’s plans to revive Bankia with state money and sort out its regions’ finances have well and truly unnerved the markets. It seems that Plan A — to inject state bonds straight into the stricken bank so that it could offer them to the ECB as collateral in return for cash — was roundly rejectd by the European Central Bank, so Madrid rapidly produced a second plan which will involve the government raising yet more money on the bond market, not helpful to its drive to cut debt.
A telling moment. Before pretty much every showdown EU summit since the debt crisis exploded into life, the leaders of France and Germany have got together beforehand to agree a common strategy. It is a truism that the European motor only works efficiently when its two biggest powers are in accord.
Spain’s borrowing costs are likely to soar at an auction of 12- and 18-month T-bills after its 10-year yields were pushed through the totemic 6 percent level on Monday. The history of the euro zone debt crisis shows that once above 6 percent the spiral accelerates and before you know it you’re at 7 percent – the level generally seen as unsustainable for state financing.