EU Banking Supervisor Deflates EUR

If it did appear that the Euro Summit two weeks ago was too good to be true, it was. Finally it seemed that Italy had defeated Germany twice in one week. First on the pitch in the Eurocup semi-final and a second time on the European Summit where all pundits claimed Angela Merkel's strong talk had vanished as Germany agreed to the European Stability Mechanism intended to recapitalize Spanish and Italian banks did not need sovereign guarantees.

Now after today's meeting of the European Commission changed the tone of that meeting when the terms of the ESM bailout included a Banking Supervisor. Euro zone banks can will note require sovereign guarantees… as soon as the European Union members have established a new banking supervisory body. This of course derails the timeline that went from a few weeks into almost a year. That is the time estimate for members to agree on the specifics of the new regulatory body.

ECB President Mario Draghi in his scheduled ECB conference commented on this new regulatory body. He praised the idea, but warned that it must not create conflicts of interest with the European Central Bank or damage its reputation. He also mentioned the ECB should retain monetary policy independence from supervision.

Spainsh yields have not reacted favorably to the announcement as the market has already priced in an earlier bailout that right now its still tied to sovereign guarantees. The yield hit 7%, with only the promise of an extra year for Spain to meet its deficit requirements.