German government bonds are trading lower Friday, but off their worst level as traders take a second look at the EU Summit decision that allows for the EFSF/ESM to recapitalize banks directly, with conclusion that this isn’t a game changer. Whilst the EU took significant steps towards establishing a ‘banking union’ and that funds for Spain’s bailout would not carry senior creditor status when transferred from the EFSF, to the permanent ESM, the mood quickly turned around after mkts concluded that many questions remain unanswered. These are notably: 1. Details are still lacking as there are no explanations yet of how the rescue funds would be used to stabilize markets. 2. Agreement to allow Spanish banks be directly recapitalised is conditional on single supervisor for euro area banks being established – this isn’t expected for at least 6-months. 3. Wires note that dropping the preferred creditor status only applies to Spain and not other countries applying for a bailout. 4. Does the ESM have enough capacity to backstop full bailout of Italy? 5. Will Germany back the changes?
EasyForexNews Research Team