Europe

Europe: positive surprise from the EU Summit, “defying defeatists” according to HSBC. Contrary to gloomy expectations, the EU Summit looks set to deliver a series of steps to ease the Eurozone crisis, fostering a bounce in the EUR and “risk on” currencies. Comments from EU leaders suggest: i) a supervisory body for Eurozone banks will be set up ii) ESM will be able to lend directly to the banks rather than through the sovereign iii) ESM loans to Spanish banks will not have seniority iv) Rescue funds can be used to stabilise bond markets HSBC notes, together, these steps will help break the vicious feed-back loop that has developed between the banking sector and the sovereign. They will also ensure that existing bond holders are not threatened with subordination as a price for banking sector recapitalisations. The supervisory body for banks will justifiably be viewed as a first step towards banking union.