Euro Leaders Give Bonds a Boost

Europe moves toward banking union, allows banks to tap bailout fund directly.

Euro-area leaders granted immediate respite to the stressed bond markets of Spain and Italy, leaving investors looking to the European Central Bank to provide more lasting relief.

By addressing flaws in their bailout programs, moving toward a banking union and trying to break a negative-loop between troubled sovereigns and banks, officials today triggered the biggest rally in Spanish bonds and the euro this year.

Seniority Damage

“If we never had the issue of seniority for bailout funds, and if we had created direct bailouts for banks ages ago, perhaps that would reduce the scale of the crisis,” said Kit Juckes, head of foreign exchange research at Societe Generale SA in London. “The damage to international confidence in European bonds has been done and won’t easily be repaired.”

Summer Escalation?

“If the summit result encourages the ECB to step in with serious support for sovereign bond markets, it could be a smashing success,” said Schmieding. “If the ECB holds back instead, the crisis could possibly escalate badly over the summer until the ECB finally relents.”

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