The decision made by EU leaders at the latest EU summit to use Europe’s rescue funds to recapitalise struggling banks has been greeted by a surge in Europe’s primary indices.
On the back of the EU summit announcements, the FTSE 100 jumped nearly 200 basis points, the CAC around 200 basis points and the Dax more than 300 basis points.
In June, the Spanish government received €100bn worth of aid in order to ease its personal sovereign debt crisis. Yields on 10 year paper breached the 7% barrier thought by most investors to be unsustainable in the long term, and the bailout seemed merely to exacerbate market fears regarding the Spanish government’s ability to pay their debt.
However, since news of the latest EU summit reached the press, yields have dropped sharply to below the 6.5% mark.
Similarly, Italian bond yields also dropped. Having been nudging through the 6% level for the last month after coming down from peaks late last year of above the dangerous 7% mark, yields on 10 year bonds dropped from 6.2% down to 5.8%, and market analysts predict that this level could drop even further in the coming days.
The move by European leaders to open the way for a Eurozone banking union represents a coup for Mr. Monti and Mr. Rajoy, Italy and Spain’s leading statesmen respectively. While their two teams opposed each other last night in the Euro 2012 final (which Spain won convincingly), the two nations found themselves on the same side in the most recent negotiations, battling Germany’s Chancellor Ms. Merkel for concessions to ease their financial predicament.
The ECB’s powers will be extended to enable it to regulate all of the Eurozone’s banks. In theory, it is hoped that international regulatory consistency will shore up the beleaguered system.
Whether EU leaders will attempt to extend the ECB’s mandate in financial regulation to the EU-27 seems in doubt with Britain considered to be heavily reluctant to cede any decision-making authority to central European institutions in the financial services arena.