So have all the world's problems been solved? Are we to expect global growth to kick into high gear?
In my opinion, there are four glaring holes in the Summit’s announcements. First, it’s clear that given the language contained within the statement, any bank recapitalization plan by the European Stability Mechanism (ESM, which replaces the EFSF, the European Financial Stability Facility) is not a guarantee; it is a possibility if strict conditions are met. Secondly, and staying on the ESM, these changes now must be ratified by all 17 Euro-zone members; and Germany still needs to ratify the first agreement. So the ESM is far from being activated. Third, the idea of direct bank recapitalization will not sit well with tax payers in the European core. And finally, fourth, the bailout mechanisms, in my opinion, are doomed to fail once Italy and Spain tap them. Once these countries tap the funds, the burden falls onto the healthier countries, and we’ve already seen that Germany will be hard to convince to contribute more funds.
If there’s a positive to this Summit, it would be that seniority was removed from the ESM. This means that private bondholders, who were forced to take a haircut on Greek loans, won’t experience the same pain; this should help Spanish yields recover. They have thus far, with the Spanish 2-year note yield falling to 4.267% and the 10-year note yield falling to 6.393%.
All that being said, with peak hurricane season just one month away, I believe the bottom is in and hedgers are now able to ease up a little on seeking down side protection on crude and refined products.
