EmailEuropean leaders have reached an agreement to allow the the European Financial Stability Fund and the European Stability Mechanism to provide direct support to banks. Previously, this support was given to governments, which in turn could support banks.
This is a positive step because it means that the risk associated with bank support is borne European-wide and not by individual countries. The support to banks would not increase the government debt of countries such as Spain or France.
Spanish and Italian bond yields have dropped sharply. The Spanish bond yield has dropped below 6.5% after rising above 7% in recent days.
There is still no agreement for the European Central Bank to provide support to banks. That would in effect allow quantitative easing in Europe. The current agreement is somewhat akin to the TARP program in which a central government is investing in or providing support to banks, rather than having the states do it.
Of course, the TARP program in the US eventually led to quantitative easing. The Germans are adamantly opposed to credit creation (printing money) through quantitative easing in Europe, but that may ultimately prove unavoidable. Today's agreement does not address that coming battle.
The agreement also does not address the underlying issue of fiscal responsibility by every country. That is something the Germans hope to achieve in exchange for greater monetary union (such as euro-bonds and a more active central bank). Nevertheless, the steps taken at this time do reflect cooperation, compromise, and will help ease borrowing conditions for Spain, Italy, and other countries.
S&P futures are up 20 points on the news.
Personal income was up 0.2% in May after a 0.2% April increase. Consumer spending was unchanged (0.0%) in May after a 0.1% April gain. This is yet another indicator of slowing growth - there is still growth, but not much.
The S&P 500 index is up 5.7% so far this year, and looks to end the first half of the year with a gain.
Founder and Chairman, Briefing.com
