Markets remain upbeat after ECB ‘watershed’
“The markets are now taking the view that this has been a ‘watershed’ moment in the eurozone debt crisis,” says John Mennis, a London-based stockbroker with the investment firm Investec.
“The fear all along in the markets was that the EU authorities didn’t understand the nature and the scale of the problem. Draghi’s speech has brought an air of calm.” On Jul 26 Mr Draghi told an investment forum in London that the ECB would do “whatever it takes to preserve the euro.”
Over the past few months, markets had been increasingly pricing in a break-up of the currency. Surging Spanish and Italian bond yields have put both countries in the frame for a bailout. Spain has already received a €100bn bailout of its banking system.
A much more sizeable sovereign bailout is on the way, but Spanish bond yields are still trading below the 7% level. “If the markets did not believe Draghi, then Spanish yields would be much higher. The markets do not wait around. Look at what happened to Ireland when it became obvious that it needed a bailout.”
Moreover, the news that hedge funds are selling German bonds means they are taking the view that Germany will have to underwrite some of the bailout for Spain and Italy.
“The alternative would be a break-up of the euro and a 20-year recession in Europe. The Germans cannot afford to take that chance,” says Mr Mennis.
“Draghi’s speech was very deliberate. He didn’t use many words and the words he did use were chosen carefully. He addressed the markets’ concerns about convertibility and convinced them that it is not going to happen.”
The ECB is the only eurozone institution that has the firepower to backstop the Spanish and Italian economies.
The EU authorities will hold meetings over September and October to propose further moves towards closer EU integration.
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