Eurozone bank agreement welcomed

Experts welcomed Germany’s bigger-than-expected eurozone debt crisis action plan last week, but still described its intervention as “baby steps”.

European leaders gathered in Brussels for a summit last Thursday (June 28), in which an agreement was struck to restructure Spain’s €100bn (£80.7bn) bank recapitalisation plan.

The new plans will see EU bailout funds being injected directly into the country’s banks.

Germany indicated it was prepared to intervene to shore up Italian and Spanish borrowing costs, saying eurozone leaders should use existing powers with their €440bn rescue fund for short-term help.

The move came in spite of Germany in recent weeks indicating it would not submit to calls that it should give short-term help to Italy and Spain.

Prior to the agreement, German business newspaper Handelsblatt ran a front-page headline entitled “Nein! No! Non!” – highlighting fading domestic support for continued eurozone intervention.

Kames Capital’s joint head of fixed income David Roberts said the moves were “baby steps” but bigger than the market expected.

“Supervision of the banking system by the European Central Bank, direct lending to banks through the European Stability Mechanism (ESM) and confirmation that lending from the ESM to Spain would not subordinate existing debt holders each has positive implications,” Mr Roberts said.

Mr Roberts said riskier assets should “bounce” and suggested core government bonds – especially German bunds – “will be vulnerable”, meaning the yields on the securities could rise.

“Longer term, it remains to be seen if these baby steps are the first on the path to European politicians addressing the fundamental problems of a single currency and diverse fiscal policies. For now, though, those long risk should enjoy their time in the sun,” he added.

Prior to the agreement, Italy sold five and 10-year debt at the highest yields since December and Spain’s 10-year yields flirted with the 7 per cent barrier – levels which triggered bailouts for Greece, Ireland and Portugal.

On Friday (June 29) Italian yields were below 5.9 per cent and Spanish yields were at 6.4 per cent.

Percival Stanion, chairman of strategic policy group at Barings Asset Management, said before the agreement there were “few signs of progress towards a common position” to tackle the European financial crisis.

But even after one, he said there is a worry Germany may make it difficult for further agreements to be struck.

“Our concern is that Germany simply isn’t feeling enough economic pain to believe it has to compromise to support other eurozone members, and other countries are still not ready to surrender control of their spending plans to a supranational body,” he said.