Courtesy of Mish.
German Chancellor Angela Merkel has worked out a deal with Spain to rescue its banks. Global equity markets and commodities, especially gold and silver, have cheered the news.
However, the bond market has let out a big yawn. The yield on Spanish 10-year treasuries dropped less than 3 basis points to 6.281%, hardly a sustainable rate.
Please consider Germany finalizing face-saving aid deal for Spain
While Berlin remains firm in its rejection of Spain’s calls for Europe’s rescue funds to lend directly to its banks, the officials said that if Madrid put in a formal aid request, funds could flow without it submitting to the kind of strict reform program agreed for Greece, Portugal and Ireland.
Instead, Spain would only have to agree to new conditions tied to the reform of its banking sector. Berlin is also exploring the possibility of funneling aid to Spain’s bank rescue fund FROB to reinforce the message that it is the country’s banks and not its public finances which are at the root of its problems.
Berlin is certainly shifting positions. Last week, it signaled it supported granting Spain an extra year to cut its deficit to the EU’s 3 percent of gross domestic product threshold, having previously held fast to the notion that austerity drives should not be diluted.
Merkel has also sent the message that she is open to Europe-wide supervision of the banking sector, albeit as a “medium-term” goal, one element of a proposed “banking union” to break the vicious circle of interdependence between Europe’s financial institutions and its sovereigns.
But she must tread carefully. Some of her political allies and leading conservative newspapers have come out strongly against other aspects of a banking reform, including the idea of a Europe-wide deposit guarantee scheme….
