MacroScope

One small step…

EU finance ministers succeeded last night where they failed last Friday and reached agreement on how to share the costs of future bank failures, with shareholders, bondholders and depositors holding more than 100,000 euros all in the firing line in a bid to keep taxpayers off the hook.

Germany and France had been at odds over how much leeway national governments would have to impose losses on those differing constituencies and, as with many EU deals, a compromise was reached whereby some flexibility is allowed.

This is not to be sniffed at. For the first time it sets a common set of rules (albeit with wiggle room built in) to deal with bank collapses but, as we’ve explained ad nauseam in recent weeks, it is only one building block en route to a comprehensive banking union which was promised last year and would amount to the last vital plank in the defences being built around the currency bloc to banish future existential threats.

The euro zone powers may well get there in the end but as our poll of 50-odd economists showed yesterday, most don’t see any progress before the end of the year, largely because Germany’s September elections will prevent any further leap beforehand. Berlin has also been distinctly cool to the European Commission’s plans for a cross-border authority to wind up failing banks backed with a common fund.

That isn’t necessarily a disaster – the poll also showed the economists don’t expect the euro crisis to return to the pitch it reached last year – but this is playing out against a backdrop of rising euro zone borrowing costs again.

Today in the euro zone – Bonds, strikes and firewalls

Big debt test for Italy which will sell 8 billion euros or more of longer-dated bonds. A short-term T-bill sale went okay on Wednesday but a day before, the secondary market reacted negatively to a sale of zero-coupon and inflation-linked bonds, pushing Italian yields higher.

The glut of ECB three-year money has ensured Italian and Spanish auctions have sailed out of the door so far this year but there will be no more largesse from the central bank so be on the look out for signs of that support fading. Analysts expect this sale to go well with Italian banks wading in again.

Euro zone money supply data on Wednesday showed Spanish and Italian banks stocked up on government bonds in February – and that was before the ECB’s second instalment of money creation to the tune of 500 billion euros. So bond sales should be underpinned for some time yet though it is clear that the central bank has bought policymakers time rather than solved the root problems.

Euro zone week ahead – Spain budgets and Italy labours

The first quarter winds to a close and, for most investors, it must have been a profitable one with stocks climbing and peripheral euro zone bond yields falling largely on the back of the European Central Bank’s efforts to pump prime the financial sector with a trillion new euros. Reuters’ asset allocation polls on Tuesday will look at whether there has been a significant pull-back from core government debt and the “risk on” trend can continue.

The second quarter may be much less straightforward (though let’s not forget at the turn of the year, no one thought the first quarter would be either) but let’s not get too far ahead of ourselves.

The coming week provides a number of chances to take the temperature of the euro zone debt saga. Spain, having ripped up its 2012 deficit target, will present its full budget a day after a general strike and EU finance ministers gather in Copenhagen where the still unresolved issue of how to structure the euro zone’s permanent rescue fund will be structured.