Chancellor announces “bank funding scheme”

Publication date: 15 June 2012
Author: Mark Deans, Moneycorp

A massive asteroid is heading towards Earth but never mind, it will pass by harmlessly later today. The story comes from NASA, so there is nothing to worry about, but just imagine how everyone would feel if the reassurance came instead from EU leaders.

Less than a week after Brussels signed off a €100bn rescue package for Spain, the country’s borrowing costs have risen to their highest point since the inception of the euro. Ten-year bond yields touched 7% on Thursday, a level which previously precipitated wholesale bailouts for Greece, Portugal and Ireland. As far as demand was concerned, Italy’s government debt auction went well yesterday. All €4.5bn of the stock found buyers, but only at a price. The Italian treasury had to pay 5.3% interest on the three-year bonds, a third more than the 3.9% it had to pay on a similar maturity last month.

Investors have not been impressed by the Spanish rescue facility and neither, it seems, has Chancellor Merkel. Addressing the German parliament yesterday she made clear her disapproval of the foot-dragging by Spain that prevented the bailout from going ahead earlier. She also objected to the bad attitude of France and Spain in their call for jointly-underwritten eurobonds which are “not feasible constitutionally and totally counterproductive. They would turn mediocrity into Europe’s yardstick.” As for throwing her country’s support behind the single currency, “Germany’s power is not infinite” and she will not take on the “Herculean task” unless there is a global effort.

Frau Merkel might not be ready to clean out the Club Med’s Augean stables but in the City last night the governor of the Bank of England and his boss set out their plan to slay the credit crunch Hydra. Speaking at the Lord Mayor’s annual banquet they outlined a scheme to put in the hands of banks £140bn which they must lend to individuals and small businesses. Unlike the asset purchase programme, in the new strategy the banks will not get the money unless they commit to passing it on.

Investors might like the plan because of its positive economic implications or dislike it because it amounts to quantitative easing with a different hat on. There has been little reaction by sterling so far but it would not be a surprise to see one when London gets going.

There will not be much else to provoke reaction today though. The UK trade deficit, Euroland’s employment change, Canadian manufacturing shipments and US industrial production pale into insignificance alongside the bigger issues. Spanish and Italian borrowing costs, Britain’s “bank funding scheme” and the imminent Greek general election will be of far more concern to investors, even if none of them will be resolved today.

That does not necessarily mean a busy FX market. Thursday’s moves were modest, typically involving less than a net half cent. Today’s could be similarly small, if only because of the extreme uncertainty of the Greek election result. But be ready for fireworks on Monday. In the meantime have a good weekend.