Daily: Already backtracking on European summit details

Daily commentary: Europe

Today’s links are in multiple parts because I haven’t posted since Thursday. The biggest news is that the EU is already backtracking on the Euro summit deal that decoupled the sovereign-bank tie which had been causing Spanish and Italian yields to rise. And predictably, Spanish and Italian yields have risen once more. On Thursday, I wrote that Ireland is the biggest winner from last European summit, largely because of the decoupling of banks and sovereigns that Europe agreed to in the summit. I wrote that:

Going forward, we will need to see both the talk of an EU-wide banking union and the Euro-TARP agreement solidify for these gains to hold.

What we are seeing now, however, is that Europe is backtracking on the agreement and therefore these gains will not hold. It is still being hotly debated under what conditions Spanish banks actually receive any money. Right now, some European officials are saying the funds must be coupled to a sovereign guarantee until a banking union comes into effect. The sovereign guarantee is essentially worthless since the banking liabilities are beyond the sovereign’s ability to backstop alone. So we are back to square one.

Meanwhile, Europe is relaxing the deficit targets for Spain yet again. Originally, the target was a government deficit of 3.5% for 2012 but it was lifted as Spain missed targets. The latest target is now 6.3% as it is clear that Spain won’t even hit the 5.3% target since they already have a 3.4% deficit through the first half of the year.

Greece is also calling for a bailout extension as it is clear that they will not hit their program targets and will therefore need more money.

Bottom line: things are looking worse in Europe, not better. And they will continue to deteriorate both politically and economically given the policy positions in place. I see little reason to hope this turns around. We should be thinking about an eventual disorderly breakup as the base case outcome for the Euro crisis and what impact that will have on portfolios and the economy.