In the aftermath of last night's bombastic European announcement coming in the late night hours, in which Europe has virtually promised the kitchen sink, one would imagine that the response for the biggest beneficiary, Spanish bonds, would be far more dramatic. Instead after ripping 60 bps tighter in a kneejerk move, the yoyo reaction has seen bonds slide wider ever since, and the result being a SPGB level last seen... on Monday. Why is the market not more enthusiastic? Because what happened last night is nothing short of the second Greek bailout announcement from October, which followed a similar pattern: a late night announcement by Europe that Greece is saved, followed by a brief rip of a rally, only to give it all back, and to require global central bank intervention one month later. Because what really happened last night? Merely promises. We will not dwell much on the fact that the ESM has yet to be ratified by the paying countries, that the ESM will now have to be scrapped in its current format, and resigned by all 17 member countries since the seniority provision is somehow scrapped: an event that amounts to a cramdown exchange offer, that while everyone is talking about the uses of funds, nobody has uttered a peep about the sources, that Germany has yet to say what the German conditions will be or whether the revised deal will even pass the Bundestag, that the deal is contingent on the formation of a "effective single supervisory mechanism is established, involving the ECB" which in Europe is next to impossible, and that finally the whole "arrangement" is nothing but an Memorandum of Understanding - the weakest form of non-binding agreement possible. Which is why we are just a little skeptical and that today's E-Tarp is merely the latest catalyst to be faded.
Spanish bonds responding and going back toMonday levels.
And again, the key part from last night's actual announcement:
"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 institution-specific, 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."
Finally, as usual, Einhorn will be right: