Banks lead markets up but is political trouble brewing in the Bundestag?

30th August 2011

In fact, there was a slew of good news about banks, as This is Money reports markets were also encouraged by remarks by EU commissioner Olli Rehn insisting that the continents' banks did not need recapitalisation, as new IMF boss Christine Lagarde had suggested a few days previously and as the Independent reports here.

A merger between two Greek banks, Alpha and EFG Eurobank, sparked hopes that more banks might merge helping them overcome capitalisation concerns.

However eurozone shares then fell back as Market Watch reports, as investors digested some more bad economic news.  

The European Commission said the August economic sentiment indicator fell to 98.3 from 103 in July more than economists had been predicting.

Market Watch quotes ING economist Peter Vanden Houte saying this is its biggest month-on-month fall since December 2008. The consumer sentiment index fell more than 5%, to minus 16.5 from minus 11.2 in July. He told Market Watch: "All in all the current level of the economic sentiment indicator, if confirmed in September, probably indicates that the recovery in the euro zone has come to a standstill."

There was still some good news from Italy as it auctioned its bonds at much lower rates than a few weeks previously, when along with Spain, the country was in the eye of the storm. The Telegraph reported that €3.75bn in bonds due in 2022 were sold at a rate of 5.22pc compared to 5.77pc previously, €2.98bn in bonds due those due in 2014 were sold at 3.87pc against 4.8pc and those due in 2018 at 4.52pc instead of 4.65pc. The paper says this points to increased confidence in bond markets, now that the European Central Bank is prepared to buy bonds from Italy and Spain.

However it is not all good news for banks or sovereign states. The Telegraph reported at the weekend that German Chancellor Angela Merkel may not be able to muster enough support in the Bundestag to support the bailout deal agreed with French President Nicholas Sarkozy earlier in the summer. It is expected that many Bundestag members from Merkel's own party the CDU and its Bavarian sister party the CSU will vote against the deal. The German Federal Court is also to rule on whether the deal is constitutional. Both challenges come on September 7, and Merkel has cancelled a planned trip to Russia.

The paper writes that "if the court rules that the €440bn rescue fund (EFSF) breaches Treaty law or undermines German fiscal sovereignty, it risks setting off an instant brushfire across monetary union."

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