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Does the silence from Europe's leaders mean they're actually working on a new crisis "solution"? Look to this weekend's G8 meeting to see
05/17/2012 2:27 pm EST
There hasn’t even been the usual package of vague promises and inadequate ideas that has served to calm markets in the last iterations of this crisis.
But I think the increasing likelihood of bank runs in Spain is going to force somebody’s hand pretty soon. Moody’s Investors Service is expected to downgrade 21 Spanish banks, and downgrade them hard, sometime after 9 p.m. Madrid time tonight. (The Moody’s re-ratings would follow the April 30 downgrade of 11 Spanish banks by Standard & Poor’s and Moody’s downgrade of 26 Italian banks on May 14.) That isn’t going to calm a market that has already faced reports of a bank run at Bankia, the Spanish bank with the biggest domestic asset base of any Spanish bank, of 1 billion euros ($1.3 billion) since the Spanish government said, on May 9 that it would inject new capital into the bank in exchange for a 45% ownership position. The report in El Mundo was credible enough that the Spanish finance ministry had to come out and explicitly deny the existence of a run. (The ministry didn’t say that deposits at Bankia hadn’t declined, just that the drop was part of a normal seasonal pattern.)
We know that European—and indeed world—leaders are burning up the lines discussing the crisis. The lack of any comments about these discussions means either that there’s still massive disagreement or that the leaders are coordinating a joint policy response.
I think we’ll know which it is relatively soon. The U.K.’s David Cameron, France’s Françoise Hollande, Germany’s Merkel, and Italy’s Mario Monti held a conference call today to coordinate their stance at what is likely to be a contentious meeting of the leaders of the G8 economies this weekend. The U.S. will once again urge EuroZone leaders to put together a package big enough to address the crisis and that includes enough pro-growth initiatives to give the citizens of austerity economies some hope that they’re pain won’t be endless.
I’d be very, very surprised if parallel discussions aren’t taking place among the Federal Reserve, the European Central Bank, the Bank of Japan, the People’s Bank, and the Bank of England on a coordinated response to a crisis that has put global growth at risk.
I’d look for a bounce tomorrow as shorts who have profited during this decline look to protect some gains before the G8 meeting. What happens after the bounce, though, depends on what breaks the silence.
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