Stocks blasted higher around the globe on Monday in response to the hope that discussions between France and Germany regarding a tighter fiscal union amongst at least some countries in the Eurozone would put an end to the credit contagion that is spreading throughout Europe. However, this morning, the situation in Europe is little changed as rates continue to rise in some countries such as Italy.
Eurozone finance ministers are meeting in Brussels today to discuss the rules for the expansion/leveraging of the EFSF. In addition the FM’s are also expected to discuss releasing more funds to Greece.
On the topic of the EFSF, which has been heralded as a savior for the Eurozone, Reuters is reporting that documents obtained Sunday spelled out rules for EFSF program. The plans for the EFSF appear to include intervention in the primary and secondary bond markets, for extending precautionary credit lines to governments, leveraging its firepower and its investment and funding strategies. Reuters cited comments from a Eurozone official involved in the preparations for the meeting who said that "I would expect we will be in a position to approve the guidelines at a political level". However, the article also pointed out that officials have told Reuters that the leveraging mechanisms for the EFSF may not become operational until January.
Given that none of the plans in Europe are likely to come to fruition in the very near-term, credit problems continue on the continent. Reuters noted Tuesday that demand for emergency funding to banks from the ECB hit a new 2-year high. Reuters said that a total of 192 banks took a combined €265.5 Billion at the central bank's once-a-week offer of unlimited seven-day loans. StreetAccount notes that the amount tops the €247 Billion that 178 banks took last week and is the second week in a row in which demand hit a fresh two -year high.
Speaking of the European banks, Moody’s said Tuesday that it has placed the subordinated, junior subordinated and Tier 3 debt ratings of 87 European banks on review for downgrade. Moody’s noted that the review will impact the banks from 15 countries in Europe with the greatest number of bank ratings to be reviewed coming from Spain, Italy, Austria and France.
All of the above are leading to ongoing credit problems in Europe. For example, the Telegraph noted Tuesday that all key measures of money supply in the Eurozone contracted in October. The article reported that the contractions in money supply increased the risk of severe recession over the coming months. It noted that the broad M3 measure (which is tracked closely by the ECB as a warning indicator) shrank last month by €59 Billion, which is a sign that a credit squeeze at the banks is underway.
Also concerning Tuesday is the fact that rates continued to rise at Italy’s latest bond auction. The Italian government sold €3.5 Billion in 3-year 2014 bonds at a gross yield 7.89%. This was a massive leap from the rate of 4.93% it paid in late October.
Finally, Reuters is reporting that a special comment from S&P says the ratings agency could lower its ratings outlook on France's AAA credit rating to negative in the next 10 days.
In closing, while the stock markets of the globe are certainly due for an oversold bounce after the drubbing seen over the past couple of weeks, the situation in Europe is not markedly better at this point in time. Although there is certainly hope that leaders will come up with a meaningful plan to combat the crisis before the next EU Summit scheduled for December 9th, we have heard this type of talk before and remain cautious toward the situation.
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Geez, and you are admittedly a charter member of the "Glass is Half Full" club. I may buy Gold, Guns, and canned food and move to a mountain in Idaho! All kidding aside, I appreciate your unbiased, clinical view of the markets.