TheGuardian: Financial markets bounce on indications that the European Central Bank will boost firepower of eurozone bailout fund
Financial markets bounced on Wednesday as hopes of further intervention in the eurozone by the European Central Bank gave some respite to investors.
Indications that the ECB could boost the firepower of the eurozone bailout fund pulled European shares out of their slump and eased interest rates on Spanish bonds. There was also relief after the German government said it was not urging Spain to take a full bailout.
After three days of declines, Spanish shares ticked up 0.8% on the country's main index, while the Italian equivalent was 1.2% higher. Germany's DAX inched up 0.2% and the French CAC 40 rose 0.2%. Only the FTSE 100 index was in negative territory, down by just 0.02% on the day at 5498 points as the market digested worse-than-expected GDP figures.
Traders were cheered by comments from Ewald Nowotny, governor of Austria's central bank and a member of the ECB's governing council. Nowotny said there were arguments for giving the eurozone's new bailout fund, the European Stability Mechanism (ESM), a banking licence. That would allow the fund to borrow from the ECB, easing concerns that its €500bn (£390bn) pot of cash would not be enough if Spain or Italy needed a bailout.
The euro bounced on the news, hitting a high of $1.22. Neil Mellor, currency strategist at Bank of New York Mellon, said: "This is seen by many as one of the few options that remains to hold the euro area together. We have to remember what purpose this cash infusion serves; it allows [countries] to get on with the process of reform. The bigger the injection, the longer they can hold out. That's why the market got quite excited."
But, he said, the rally was limited because it was clear Nowotny's views were not shared by his colleagues in the ECB. Earlier this month, ECB president Mario Draghi dismissed the idea of granting the ESM a banking licence. "I don't think there's anything to gain in destroying the credibility of an institution, asking it to behave outside the limits of its mandate," he said. The president of Germany's central bank has also expressed reservations about the idea.
Yields on Spanish government bonds – in effect their interest rate and a reflection of their risk rating – also eased. Concerns that Spain would have to seek a full bailout have escalated in recent days, after the Spanish finance minister, Luis de Guindos, met the German finance minister, Wolfgang Schäuble, on Tuesday. Reports suggested Schäuble had urged De Guindos to request a full bailout, sending the yield on the Spanish 10-year bond to a euro-era high of 7.78% on Wednesday morning. But the yield dropped to 7.43% after the German government dismissed the claims. Asked whether Schäuble had made such a request, a spokesman for the German finance ministry said: "That's absurd and not up for debate."
The prospect of Greece leaving the eurozone also retreated after a senior German politician suggested the country may need a second debt restructuring to stay in the euro. Norbert Barthle, a leading political ally of the German chancellor, Angela Merkel, told Bloomberg: "We should try to keep Greece in the eurozone." If action is needed to do so, "not just taxpayers but also private creditors would again be involved in helping Greece, but under strict conditionality," he said.
The more buoyant mood among investors was tempered by appalling UK GDP figures and a survey in Germany that showed business morale falling in Europe's largest economy. The Ifo thinktank said German business sentiment dropped for the third month in a row in July, to its lowest level in more than two years. Carsten Brzeski, economist at ING bank, said: "It looks as if German businesses have finally woken up to reality. Today's Ifo index sends a clear warning that even the most solid ship can capsize in a rough thunderstorm."
Meanwhile, policymakers continued to push for the implementation of measures decided at the last eurozone summit. On Wednesday De Guindos held a meeting with the French finance minister, Pierre Moscovici, to discuss the creation of a single body to supervise eurozone banks. In a joint statement, the pair stressed the urgency of putting this in place by the end of the year.
"Our common strategy for the stability of the euro area includes the adoption, by the end of this year, of a single supervisory mechanism for banks of the euro area, involving the ECB. We expect proposals by the commission by September and commit to a swift negotiation." They said the creation of the supervisory body would open the way to channelling bailout funds directly to banks, but said the aid would still come with conditions.
Spain's inverted curves
In baseball jargon, curve balls can leave you flat on your behind. Spain's debt crisis appeared to be heading for the economic equivalent yesterday.
The yield curve on Spanish bonds threatened to invert, displaying a classic sign that a national economy is heading towards the rocks. A fresh bout of early morning jitters in the City saw the yield, or interest rate, on Spain's two- and five-year bonds jump to new record highs. Yields are a useful proxy for the riskiness of a bond and, therefore, the creditworthiness of a country's economy.
At one stage yesterday Spain's five-year bonds were yielding 7.45%, more than the 10-year bond. And this is curve ball territory, where the usual dynamic of short-term debt being safer than long-term debt is switched around, or inverted.
City analysts warned that the Spanish yield curve, which normally rises as bond maturities lengthen, was "flattening" as the yield on typically less risky debt rose. Two-year bond yields briefly spiked as high as 7.18%.
"Demanding such high interest rates of investors, for even short-term debt, shows us their angst," explained Louise Cooper of BGC Partners.
And it looks increasingly likely that only the European Central Bank can hit this crisis out of the park. Graeme Wearden