Spain got a lifeline from its Euro-zone partners for its banking
system and China's trade picture does not look as bad as many
suspected. Both are reassuring enough to give stocks a lift today.
The question is whether today's optimism will prove enduring
enough, particularly with a critical vote in Greece coming ahead on
Sunday? I will be keeping my fingers crossed, but the Europeans
have done the right thing by ring-fencing the Spanish banking
system before the potentially destabilizing Greek vote.
The Spanish government is going to great lengths to characterize
the weekend deal as not a bailout for the country but essentially a
credit facility for its banking sector. But irrespective of how the
deal is described, it nevertheless confirms that Spain was finding
it difficult to raise the funds to recapitalize its banks. Spain
will essentially be borrowing €100 billion from the Euro-zone's
bailout funds and funneling those into its banks. As such, while
deal may have been different from the onerous conditionalities
accompanying the Greek, Irish, and Portuguese bailouts.
But Spain will nevertheless be facing greater scrutiny and
oversight of its banking sector from Europe going forward.
Importantly, the new debt will likely have 'seniority' over
existing and future government liabilities, meaning that it will
need to get paid back first before other bonds can get repaid. This
subordination of existing government bonds to the new debt could
potentially start showing up in the yields that those bonds
Attention now shifts to Greece, where a pro-austerity mainstream
party is pitted against an upstart political force (Syriza) opposed
to the German-inspired fiscal prescription. Opinion polls show the
Greek electorate evenly split among the two parties. The speed with
which the European leaders approved the Spanish measure seems to
suggest that they wanted to get ahead of an outright Syriza victory
The domestic economic calendar on the thin side today, but we do
have a number of important economic reports on deck the rest of
this week. The May PPI and CPI readings coming out Wednesday and
Thursday, respectively, are expected to show declines on a
'headline' basis given the recent drop in gasoline prices, though
the 'core' readings are expected to be unchanged. We will also get
the May Retail Sales numbers on Wednesday, while Friday brings the
May Industrial Production and the June Empire State manufacturing
survey. We will also get the weekly Jobless Claims data on
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