Two big stories out of Europe have stocks rallying this morning.The first comes from a Bloomberg interview with the Austrian representative to the European Central Bank, Ewald Nowotny, in which he appeared to endorse discussions about giving the European Stability Mechanism—a new European bailout fund that will likely be activated later this year—a banking licence.
I think there are pro arguments for this, there are also other arguments, but I would see this as an ongoing discussion. It is not something that is only in the field of monetary policy, so this is part of a broad discussion.
This would dramatically increase the firepower of the fund, allowing it to borrow from the ECB against collateral provided by the eurozone’s more stable countries. Right now, investors doubt that the funds devoted to bailout funds would be large enough to actually rescue Spain or Italy.
Brown Brothers Harriman’s Marc Chandler highlights elaborates in a note out this morning:
The fact that the comments come from one of the “creditor” countries is noteworthy. We know many trial balloons have been released in recent weeks, and so warn against getting too excited about this idea. However, it could signal a softening stance as the crisis intensifies and necessitates bolder action.
Admittedly, Nowotny is one of 23 representatives at the ECB. What’s more, even if the ECB were actually drifting towards giving the ESM a banking licence, it is unclear that it could legally do so.
The second big headline this morning is coming out of Spain, indicating that they could be nearing some kind of major policy action.
El Economista’s top story earlier today was “Germany wants Spain to ask for a bailout of 300 billion euros”:
Germany wants Spain to formally ask for a bailout of 300 billion euros to solve its grave liquidity problem. With this amount of money, our country would be able to finance itself at a low cost for a year and a half or two years, a period in which it would face—without the asphyxiating pressure it suffers right now, with its risk premium at records—debt maturities and rollovers to cover its forecasted public deficit.
Those reports cite comments by Spanish Economy Minister Luis de Guindos and German Finance Minister Wolfgang Schaeuble, referring to the inevitability of a bailout.
According to Spanish newspaper ABC, the German finance minister’s office denied allegations that Germany is pushing Spain towards a bailout and that the country is “on the brink of a bailout,” however chatter about those comments continues to circulate.
This isn’t the first time that Schaueble has made ominous statements that some European country is failing, however apparent agreement from de Guindos have riled up investors.
Neither of these two reports is particularly significant on its own, however increasing chatter about Spain is nearing the brink of illiquidity has led some investors to predict that European leaders are about to be forced to take stronger action.
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