The European Central Bank (ECB) is now the focus of investors urging the ECB to reclaim the lead in crisis-fighting after eurozone governments on Friday delivered relief to the bond markets of Spain and Italy.
By addressing flaws in their bailout programs, moving toward a banking union and trying to break a negative loop between troubled sovereigns and lenders, leaders sparked the biggest rally in Spanish bonds and the euro this year.
Whether the gains continue may depend on the willingness next week of ECB policy makers to reward political progress with greater crisis-fighting steps of their own. Governments must also avoid their past mistake of declaring victory too soon as investors press them to move faster on binding the 17-nation eurozone more tightly.
“The ball is very much in the ECB’s camp,” said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “The statement creates an environment in which it makes it easier for them to take more unorthodox decisions.”
Stocks jumped along with Italian bonds after 13-and-a-half hours of talks ended with leaders paving the way for cash-strapped lenders to tap Europe’s bailout fund directly once they establish a single banking supervisor. Until now, they had to get aid through their governments, piling pressure on already beleaguered national coffers. The Frankfurt-based ECB will play a role in the new supervisory body, officials said.
The euro’s guardians also agreed to drop a requirement that taxpayers get preferred creditor status on emergency loans to Spanish banks. Other steps included agreeing to use rescue funds to stabilize markets in certain conditions.
“There is pressure on the financial markets, that cannot be denied,” German Chancellor Angela Merkel told reporters in Brussels yesterday. “There was an interest here to find solutions. My task was to see to it that the solutions respect the procedures and rules that we have.”
Establishing the bank monitor and allowing the bailout fund to recapitalize banks could take “several months or perhaps a year,” she later told Germany’s lower house of parliament in Berlin.
Summits have proved false-starts before. The euro weakened against the US dollar in the seven days following four previous similar meetings, according to a report this week by Valentin Marinov, head of European and G10 currency strategy at Citigroup Inc in London.
“There was a good reaction, but I don’t know if this series of provisions will be enough,” Italian Prime Minister Mario Monti said. “Many European decisions in the past were thought to have been enough, but then that’s not how it worked out. I see more content than many other times in the past.”
The latest measures are aimed at luring investors back into markets and breaking a vicious circle in which the woes of the banks reinforced those of the sovereign and vice versa, fanning a crisis which this week claimed Cyprus as its fifth victim. They also aim to soothe bondholders spooked by the terms of a Spanish banking bailout that sapped the feel-good factor created by Greece’s election of a pro-bailout coalition government.
“If we never had the issue of seniority for bailout funds, and if we had created direct bailouts for banks ages ago, perhaps that would reduce the scale of the crisis,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA in London. “The damage to international confidence in European bonds has been done and won’t easily be repaired.”