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Does Europe Finally Understand Market Expectations?

As the news broke that the euro zone had agreed to lend Spain up to €100 billion($125 billion) to shore up its ailing banking industry, I began to wonder if European Union leaders had finally begun to understand market expectations.

The "Europe" sculpture by Belgian artist May Claerhout, showing a woman holding up the symbol of the Euro, stands outside the European Parliament building.
Adam Berry
The "Europe" sculpture by Belgian artist May Claerhout, showing a woman holding up the symbol of the Euro, stands outside the European Parliament building.

Time after time during the European debt crisis, grand plans aimed at drawing a line under the problem have appeared to be behind market expectations, giving the impression that each measure has yet to catch up to the curve.

Whether it was the bailout of Greece (twice), Ireland or Portugal, by the time the deal was finally done, investors had moved on to worry about another factor that euro zone leaders had not yet dealt with, usually due to their need to get to push through a bailout, either at the EU level or domestically.

This weekend could, therefore, be critical if it marks the weekend that the EU finally gets ahead of the market. Spanish Prime Minister Mariano Rajoy used a press conference in Madrid on Sunday to claim that he wanted this deal. "I was the one putting on pressure," he said. "I'd like to know why this deal wasn't reached earlier."

In fact the deal happened pretty quickly, compared with other major bailouts. This deal is different, as it is not a bailout of a sovereign nation, but instead a loan to help recapitalize one nation's banks. While many have argued for some time that Spain’s economy is in serious trouble and would need a bailout of some sort at some time, this deal to support Spain’s banks has been pulled off in a fairly fast manner.

Last weekend, a report in Germany's Der Spiegel indicated that Berlin was pushing Madrid to accept funds from the European Financial Stability Fund (EFSF)in order to recapitalize its banks. One week later, the deal is done, and the Spanish Prime minister is free to fly to Poland to watch his soccer team defend its European title.

The deal itself has also beaten expectations. Reports indicated that Spain’s banks needed about €40 billion before the IMF reported that they could need up to €50 billion. Twenty-four hours later, the Wall Street Journal reports that the EFSF will offer €100 billion of support, twice what was expected.

All of this has been done well before the open of the markets in Tokyo, Seoul and Sydney, but just in case investors decided to start fretting about something else, we also get a report that hits claiming that work is underway on creation of a Eurobond.

Der Spiegel, which has a good record of accurately breaking stories about German Chancellor Angela Merkel when her positions change, reports that European Central Bankboss Mario Draghi, European Commission boss Jose-Manuel Barroso, the European Council chief Herman Van Rompuy and Eurogroup chair Jean-Claude Juncker are working on plans for a “genuine fiscal union.” The report cites four senior sources.

Under the plan, governments would only be able to spend money they have covered by revenue, and would need sign-off from a powerful group of finance ministers—led by a "European Finance Minister"—if they want to borrow. Only once they have this sign-off can new money be borrowed via the issuance of a Eurobond.

If this report is proven correct, it will be huge news and the focus of investor attention, removing the chance for investors to get ahead of the crisis plan. It's almost like someone behind the scenes has finally awakened to market expectations, and is trying to get ahead of them.

The one problem, of course, is that the Greek election is still too close to call, and could throw a wrench into the works just as things began to start looking up.

Could it be that someone in Berlin, Frankfurt or Brussels will offer an olive branch to the Greek people over the coming days, and convince voters to stick with the euro?

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