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There is a more than even chance that the European Union will get something right this week. I expect finance ministers to reach a sensible agreement on the outstanding details of the special purpose vehicle that is to provide a protective shield for the weaker eurozone members.
Uncertainty over the scope of the SPV contributed to last week’s turmoil in European capital markets. Another source of instability were German media reports suggesting French banks were dumping large holdings of Greek bonds on to the European Central Bank. There was no hard evidence to support it, but there were no hard denials either, as a result of which this suspicion rattled markets for several days.
The underlying cause of last week’s rise in sovereign bond spreads was thus lousy communication. The market panic would never have arisen if the ECB had provided details of its bond purchases, or if European finance ministers had clearly communicated which elements of the SPV had been agreed and which had not. In the absence of details, people assume the worst. Last week they did. Read full article in the Financial Times...
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