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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 neverthelessbe 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 carry.
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 on Sunday.
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 Thursday.
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