The latest chapter in the European saga has seen a bank rescue for Spain, the run-up to which produced one of the best weeks for equities in 2012.
After several weeks in which investors were focusing on the deteriorating lending dynamic in Spain and the usual feedback loop of selling off Spanish government bonds, the authorities came to the rescue with a €100 billion bailout for Spanish banks. The last ten days have seen equity markets recover and it seems it may continue.
The bailout and subsequent market response followed the usual format for the European crisis and the impact it has on investors.
Periods of crisis and concerns about forced sell-offs were followed at the last minute by another pan-European rescue package. It is far too soon to tell whether or not the €100 billion set aside to recapitalise Spanish banks has the desired effect and allows bank lending and economic growth to start again.
It’s possible there is more to come from the international authorities regarding European bank co-ordination and moves towards pan-European bank deposit insurance.
Future moves are likely to be triggered in part by crisis and in part by government action. Any credible solution must be pan-European based as markets simply don’t believe in the guarantees of any one single country any more.
Plausible solutions include pan-European bank regulation and deposit insurance, looser terms for the multi-national fiscal pact and ring-fencing bad banks. Other options include issuing Eurobonds, a full fiscal union or Greece accepting austerity forever.
The Greek elections this Sunday have the potential to elect a government which will look at the Spanish bank bailout and ask whether a similar package could be used to help Greece.
Another thing that helped improve sentiment was China’s first interest rate cut since 2008. The 0.25 per cent reduction was more symbolic than having any real impact – it means little in real terms because nominal interest rates are so low in China relative to economic growth. However it does signify that the Chinese government continues to believe activity has decreased to the level at which it needs stimulating.