EU Accord on Spain Offers Opportunity to Sell: Analysts’ Comment

Currency and fixed-income analysts comment on the agreement by European leaders to relax conditions on emergency loans for Spanish banks and possible help for Italy, following talks that ended at 4:30 a.m. in Brussels.

Spanish and Italian bonds rallied and the euro strengthened by the most this year. The comments were collected in interviews and investor reports today.

Kit Juckes, head of currency research at Societe Generale SA in London:

“The measures are enough for short-covering but this is not a game changer. Removing seniority for bailout funds is really good and especially good for Spanish bonds but it’s not going to fully restore international confidence in European bond markets. Direct funding of bank bailouts removes some of the strain on governments but doesn’t give us growth.

“In the currency market this isn’t enough to break out of the ranges. If the euro spends much time around $1.26 without breaking higher people will come in next week and think about going short again.”

Padhraic Garvey, head of developed debt markets at ING Groep NV in Amsterdam:

“Market expectations from the summit were low but the fact that we have some concrete plans is positive. The deal on non-seniority for Spanish bailout loans is also a nod in the right direction.

“There is also the implicit threat” that the European Financial Stability Facility and European Stability Mechanism “will come in and buy government bonds,” he said. “This won’t happen today with the periphery rallying. If they do come in they need to do it in style. The authorities will wait until they have the next big explosion in spreads.”

Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt:

“The surprising element is the immediate utilization of EFSF/ESM, which aims to keep Spanish and Italian yields in check. The reference to the ECB ‘serving as agent to EFSF/ESM’ in conducting market operations suggests that the measures are supposed to involve mainly secondary market interventions. Hopes about such intervention should give near-term relief to peripheral yields, with spreads to bunds tightening.

“It should not be too long, however, until market participants will begin to contemplate the limitations of this approach. First, unlike the European Central Bank, the EFSF/ESM do not have the means to intervene in size.

“We thus expect another round of EU summit relief to ensue this morning. Unless some of the key limitations are quickly addressed in a convincing manner, however, such relief should be used to sell. In the longer-run, these decisions will accelerate the introduction of the euro bond via the back door.”

Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London:

“Crucially there is nothing in regard to the size of firewalls in place. As the European day unfolds there may be increased concerns over reaching agreement on a ‘single supervisory mechanism.’ This may sound easy enough on paper but involves national governments ceding control of its banking sector to a European body -- a sovereignty issue that will not be easily agreed.

“These agreements do at least offer scope for some near-term recovery in risk assets. Expectations will now be high that either today or next week, the ECB as agent to the EFSF will begin purchasing Italian and Spanish debt.

“The ‘growth plan’ and an ECB rate cut next week -- which we expect -- may help lift optimism for a period. However, our initial view is this deal is no game-changer and any euro-dollar rally will simply offer attractive levels to sell.”

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