Meltdown in Spain has once again been averted with an agreement to provide direct banking support from the European bailout funds (EFSF and ESM). As usual, the market has cheered, but are the fault lines really all closed?
Watch Out For That French Downgrade
That Retired Guy (TRG) has been very vocal about the risk of a French downgrade from Moodys or Fitch. The direct risks have actually come down a bit because the ECB has been relaxing it's collateral rules so that the rating agencies opinions are less important. However, they will still matter to the market, and also to the guarantees provided to the EFSF. And a downgrade can only be more eminent now that Hollande has made it clear that austerity is not his plan.
TRG is sticking to his prediction that a French 10 Year Government Bond yield of 4% or more would predicate another serious turn in the crisis.
Did They Really Agree? Really?
Today, the markets are very excited about the agreement to allow the bailout funds go directly to Spanish banks. However, the real work is yet to come, and the likelihood that there will be some bickering over the details seems almost certain. If the details have some holes, then the net effect will be disillusionment with Europe's ability to end the crisis, and that in itself may cause problems.
Cyprus has requested a bailout. Any surprises will make for nasty headlines. Cyprus is a small country, and the bailout funds available are certainly enough plug any Cypric hole, however there is still a change that Cyprus becomes a catalyst for bigger problems.