Spain and Italy win concessions

By Michael Hewson (Senior Market Analyst at CMC Markets UK)

Late last night EU leaders managed to agree a €120bn growth compact along with a €10bn boost for the European Investment Bank designed to increase infrastructure financing, as well as helping with funding for small and medium sized businesses. The agreement also called for project bonds.

European leaders also agreed to alter the structure of Spain's bank recapitalisation plan, meaning that the loans aren't added to the sovereign's balance sheet.

The change of position came after Spain and Italy refused to sign off the growth plans until action was taken to help bring down their borrowing costs. Italy was especially insistent having to pay the highest rates since December last year for 5 and 10 year paper, while Spanish bond yields once again hit the 7% mark.

The news that EU leaders have also relented and allowing the bailout funds of the EFSF and/or the ESM to buy Spanish and Italian bonds directly, without a troika program and without the problems of seniority, in place of the ECB, however that in itself raises its own problems.

The EFSF is soon to be wound down and needs to raise its funds on the open market, while the ESM doesn't exist yet, though its biggest contributor Germany should ratify it today in the German parliament. The problem with that is the fund has a maximum capacity of €500bn and that includes Spain and Italy's contribution, so it could well run out of money quite quickly.

Nothing has been agreed on a roadmap to a fiscal compact, a banking union and further fiscal integration meaning that while this may have given a short term pop to markets there still remain a lot of unanswered questions and the fear is that Monti's intransigent tone may well have damaged relations irreparably in the longer term, especially with Germany. 

EURUSD - yesterday's move below the 1.2430 support area ran out of puff at 1.2405 but nevertheless the move lower keeps the pressure on the downside towards the 1.2290 lows. This morning's short squeezes find resistance at the 1.2620 area, and behind that at 1.2820/30.The primary objective still remains the 2010 post first Greek bailout lows at 1.1880.

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