Financial markets appeared on track for another bloody session Tuesday morning; with U.S. traders again focused on Europe, where Italian bond yields were surging to record spreads vs. German counterparts. Then Italian yields started falling abruptly, the euro rallied and the "risk off" trade was aborted, at least for the moment.
Several factors were cited for the turnaround:
- - Rumors the European Central Bank has reversed course and will revive its bond-buying program. "The ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday," former Bank of England policymaker Willem Buiter, now chief economist at Citigroup, told reporters in London. "If the ECB doesn't come in, the Italian bond auction is likely to fail."
- - Hopes that Italy's Parliament will approve the $56 billion austerity package and take other steps to eliminate the country's budget deficit by 2014, as PM Berlusconi has pledged.
- - Reports the EU will backstop any banks that fail the European stress tests when results are released on Friday.
- - Comments from Olli Rehn, the EU's senior economic official, that finance ministers have reached a consensus with private debt holders over how to structure a "strategic default" of Greek debt.
Raoul Ruparel, an economic analyst at Open Europe, a London-based think tank, says the ECB bond buying — if true — is the most significant of those myriad developments as it shows at least one European institution sees the urgent need for action.
"The ECB is starting to look worried. [They] realize this is a very serious situation," he says.
EU finance minister, on the other hand, have had "so many meetings over last month or so and yet they haven't really made much headway on second bailout deal" for Greece, Ruparel notes. "You have to wonder how much urgency they're really feeling."
Tuesday brought reports of another emergency meeting of EU finance ministers later this week but "at the moment, there doesn't seem to be any solution in the pipeline," he says. "They keep switching between different plans [and] no solution is forthcoming."
Ruparel predicts it will be "a couple of weeks" before a second bailout package for Greece is announced but does not think ministers can wait until September, as Germany's finance minister suggests.
"If they want to kick the can down the road [again] they need to get it done by August," he says. "Some people are coming around to the fact that a Greek default will happen and you really need to find a long-term solution."
Between now and whenever another bailout plan for Greece is announced, expect more volatility in the financial markets — both here and abroad — as traders react to the latest headlines coming from Europe.
- Willem Buiter
- chief economist
- the European Central Bank
- finance minister
- until September
- budget deficit