Why The Latest Market Calm Will Soon Get Blown To Bits...

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In its morning note, Nomura comments on today’s calm market…In many ways this was not surprising as there were no major data releases or unexpected headlines. Spain’s austerity measures, which aim to trim the public budget by €65bn over the next two and a half years including by raising VAT 3pp to 21%, broadly met expectations. However, we don’t think that the current valuation provides stable equilibrium, and thus in our view the calm is unlikely to last for long. The economy is continuing to deteriorate and we see the current crisis-resolution mechanisms such as the ECB rate cut or EFSF/ESM as not only insufficient, but parts of it far from operational. Yesterday’s German constitutional court hearing on the legitimacy of the ESM indicated that the consultation process may take more time (normally two to three months), meaning that the ESM, which was originally scheduled to become operational on 1 July and then 9 July, is likely to be delayed further. Also the draft Spanish MoU, basis for the bank recapitalization raises concerns about how the bad Asset Management Company will be funded and what will be the impact of the creditor burden sharing on the Spanish banking sector’s ability to raise funds.

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