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.
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 concerned out.
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 this month.
On the home front, we don’t have much in terms of top-tier economic reports today. In corporate news, Texas Instruments (TXN - Analyst Report) raised the lower range of its earnings guidance, while Juniper Networks (JNPR - Analyst Report) announced a $1 billion share buyback program. Michael Kors (KORS - Analyst Report) , the women’s apparel maker, came out with better-than-expected quarterly results and guided higher.
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