After the EU summit exceeded expectations the more considered verdict of the markets will dictate in the short-term, certainly until the European Central Bank’s policy meeting on Thursday. Previous summit deals crumbled pretty quickly buying only a few days or even hours of market relief.
After strong gains on Friday, Asian stocks are up modestly and European shares have edged higher. However, German Bund futures are nearly half a point higher, so something’s got to give and more often than not it’s the stock market that thinks again. So maybe Friday’s rally was a one-off.
For it to have any legs, the ECB may well have to come up with something on Thursday, and a quarter-point rate cut – widely priced in – may not be enough. ECB policymaker Asmussen is already out saying Greece must should not loosen its bailout programme, Spain can restore confidence with a bank recap plan that builds in a large margin for error and dismissing calls for the ESM rescue fund, which comes into being next week, to get a banking licence so it could draw on virtually unlimited ECB funds. That all sounds fairly uncompromising.
No one is getting carried away. The agreement in Brussels to accelerate progress towards cross-border banking supervision after which the ESM rescue fund will be allowed to directly inject capital into banks was a big deal for Spain since it will keep its bank bailout of up to 100 billion euros off the government’s wilting balance sheet. The agreement that the ESM would not have preferred creditor status for Spanish loans, something that had spooked private investors who would have dropped to the bottom of the repayment pecking order, is also significant and will surely set a precedent.
But Spain remains in a whole heap trouble – deep in recession, unlikely to meet its deficit targets this year and facing some daunting looking debt refunding humps in the next few months.