Progress of a sort on Euroland banking integration

Publication date: 14 June 2012
Author: Mark Deans, Moneycorp

A chap called Frank M. Fazio is suing Apple. Frank’s complaint is that his iPhone works more slowly than those in TV commercials. His suit claims that the phone “either did not understand what the plaintiff was asking, or, after a very long wait time, responded with the wrong answer”. Financial markets make much the same accusation about EU leaders.

Their latest answer, leaked in beta form yesterday to pre-empt Sunday’s Greek election, is a long-awaited response to the question of joint bank guarantees. The Independent reports that the proposal, due to be discussed by EU leaders later this month, provides for “a pan-European banking union and closer integration, the two areas where frightened investors have been clamouring for progress”.

Separately, the Daily Telegraph says Chancellor Merkel is now more inclined to go along with a €2.3tr “redemption fund” that would cover excess sovereign debt in the eurozone. It is not something likely to be agreed at this month’s summit meeting, but the new mood in Berlin is a big change from last November when the idea was rejected out of hand as “totally impossible”.

Whether or not it was these two stories that helped it along, by and large the euro had a good day on Wednesday. It strengthened by a third of a yen, three quarters of a US cent and half a British penny*. The mini rally was entirely sentiment-driven. Euroland ecostats had nothing to do with it; industrial production in the eurozone was down by -2.3% in the year to April and by -0.8% on the month itself. An interesting twist came when Germany was stuck with an increased rate of interest on its issue of ten-year bonds; 1.52% instead of the 1.47% it had to pay last time around. Diddums.

Interest rates are in the spotlight again today. The Reserve Bank of New Zealand announced overnight, to nobody’s surprise, that it would keep its Official Cash Rate at 2.5%. In Zürich the Swiss National Bank will hold a press conference this morning to explain what – if anything – it intends to do to make the franc less attractive to investors. Short of taking it negative there is not much it can do with its benchmark interest rate but the SNB might have other, non-monetary measures in mind to deter speculative buyers. Tonight the Bank of Japan might or might not come up with some new monetary wheeze following the governor’s summons to the Diet this morning – his 20th appearance there so far this year.

Italy will test investors’ appetite for Club Med government debt with an auction of €4.5bn of three-, seven- and eight-year bonds. Yesterday’s sale of one-year bills was not a good omen: Italy had to pay 3.972% for its money, 163 basis points more than before the Spanish bailout.

Today’s economic statistics cover Euroland and US inflation, US weekly jobless claims and not much else. Tonight Chancellor Osborne and Governor King will deliver their annual Mansion House speeches. It would be a surprise if Sir Mervyn were not to draw attention to the downside risks for the UK economy and the temporary strength of sterling as a result of fugitive money inflows.

*That’s half a pence for our younger readers.