The Merkozy duo began the week by serenading the markets until they felt a strong faith in the European summit to take place tomorrow and the following day.
Among their most popular tunes were the statement of the Greek default is a one-time event and the agreement that the private sector will not suffer losses due to bailouts once again. That has a beneficent impact on the Spanish banking sector because its capital requirements are lightened.
The mark-to-market valuation of sovereign debt currently held by Spanish financial firms who are forced to drop 2% in value, which accentuated the difficulties in complying with the most stringent restrictions imposed by the European Banking Authorities (EBA): 9% of top-grade capital.
With the latest Franco-German plan, the titans of our banking sector are due to save about 4.8 billion euros of money tied to bailouts and provisions and the tough ins and outs of an arduous recapitalization. One blow less for a sector that is going through difficult times marked by stagnant business activity, financing hardships and a credit crunch.
Besides Merkel and Sarkozy?s agreement, now the EBA has declared: to determine how to calculate sovereign debt owned by the banks or if it will acknowledge high-quality corporate debt as well, which is, de facto, a reduction of the 9% requirement and contributing to reducing the pressure on the financial sector.
It is not enough that the winds are blowing gently behind the Spanish banks. During these hard times, the rules of the game need to be outlined clearly in order to ward off uncertainty.