Tuesday, June 12, 2012
Yields on Spanish government bonds are up again today, reflecting
continued anxieties about that country despite the strong show of
support from Europe over the weekend. Is it a vote of no confidence
in the size and nature of the deal itself or a reflection of the
lack of details that the market craves? Hard to know exactly at
this stage, but it's most likely a little bit of both.
More importantly, it reflects the overall unsettled state of the
Eurozone debt picture ahead of Sunday's Greek vote. Some have even
started whispering about tiny Cyprus as the next domino to fall.
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This past weekend, Eurozone leaders appeared to be taking out an
insurance policy through the Spanish banking deal against a
potential unfavorable verdict in the Greek election next weekend.
In their admirable haste to announce some sort of a plan, they left
out a number of details that the market seems particularly
The most important of these concerns whether the funds will come
from the European Financial Stability Facility (EFSF) or the
European Stability Mechanism (ESM) that comes into effect next
month. If it's the latter, then it would mean that Spain's new debt
will take priority over the country's existing debt obligations, an
unattractive proposition for bondholders. It is also uncertain
which banks would get the capital injections, and what the Spanish
government would get in return.
But beyond these issues of the deal's details is the doubt over the
Europe's ability to come to grips with the totality of the region's
problem, which is expected to come to a head in Sunday's Greek
election. This week's Economist magazine captured these doubts
beautifully with a front page picture of a drowning ship depicting
the world economy issuing a distress call "Please can we start the
engines now, Mrs. Merkel?"
Just like with the Spanish bank deal, Germany will need to show a
lot more leadership in the coming days to stop the slide. The
country needs to move the Eurozone towards a banking union and some
measure of debt mutualization. Short of credible progress on those
fronts, they will continue to offer band-aid solutions to one
crisis after another, without tackling the problem's root cause.
Let's hope we see some leadership in the summit meeting later
On the home front, we don't have much in terms of top-tier economic
reports today. In corporate news,
) raised the lower range of its earnings guidance, while
) announced a $1 billion share buyback program.
), the women's apparel maker, came out with better-than-expected
quarterly results and guided higher.
Director of Research