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Germany’s 2 to1 loss wasn’t only seen on the football pitch (whoa, that was weird to write for someone who grew up calling it soccer)but also felt at the EU Economic Summit. Italy & Spain scored a victory against Germany as EU leaders agreed that funds being raised to recapitalize troubled banks wouldn’t be ranked ahead of those of private investors. This will allow existing Sovereign debt holders to remain senior to that of the bailout funds. The goal being to drive Italy and Spain’s debt yields lower. In overnight trading, the announcement has led Italian yields to drop below 6.0% from yesterday’s 6.2% highs and those of Spain to fall back below 7.0% to 6.79%.
In return for boosting its sovereign debt demand, Italy and Spain backed the formation of a banking union to create a single overseer of Eurozone banks. In yesterday’s analysis EU Economic Summit Preview: Banking Unions & the EURUSD we wrote that the implementation of a banking union would need to brought up if Italy and Spain wanted any chances to convince Germany of achieving some sort of matter of collective responsibility.
As expected, the Euro was higher across the board on the announcement. However, the gains could be short lived depending on the way Germany’s Angela Merkel spins the announcement to her government and nation. In initial comments on the matter, German official have called the agreement a short term measure and haven’t yet yielded to any sort of structured collective responsibility program. As such, unless the EU can answer the question of where is the region’s growth going to come from, bond buyers may not be willing to get too excited about Italy’s and Spain’s bonds.