Saturday, June 30, 2012

Current Rally will be short-lived!!


• We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate 
conditionality, including compliance with state aid rules, which should be institutionspecific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.  

• We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.  

• We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent 
to EFSF/ESM in conducting market operations in an effective and efficient manner.

• We task the Eurogroup to implement these decisions by 9 July 2012. 

The announcement said, "We task the eurogroup to implement these decisions by July 9, 2012." Does this include the sovereign bond buys? It is unclear. (There needs to be unanimous agreement of this deal.)

How long will the euphoria of the meeting's decision last?
How long will today's rip-your-face-apart rally last?
Hard to say.
But for a number of reasons, it is most likely that it will be short-lived.
The most significant reasons for this view include the recently weakening corporate profits picture in the U.S. -- see Nike (NKE_)Ford (F_) and the like -- and the likely expanding divide between the Republicans and Democrats following yesterday's Supreme Court decision on healthcare. On the latter point, there is a positive in that the Supreme Court's ruling could energize the Republican Party's base and lead to a stronger turnout, which would bolster Governor Romney's chance of election in November.
As well, another important reason why today's ramp might exhaust itself is that the initiatives fail to address the deep structural problems facing the EU.


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