Markets are getting edgy again.
The initial burst of euphoria over the latest bout of quantitative easing is starting to wear off. And investors are starting to get jittery about Europe again.
Why? Hasn't Mario Draghi saved the eurozone?
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Not quite yet. He's said he will help but the troubled countries have to ask for it. And as we'll see below, there are some good reasons why they might not want to.
Does this mean we're heading for another big panic over Europe? I don't think so. But we might get a decent buying opportunity
Spain doesn't want to ask for help
Spanish prime minister Mario Rajoy is walking a very thin tightrope right now.
To recap: Spain's basic problem is that it had a massive property bubble, which has well and truly burst. That has devastated banks' balance sheets, even if they don't like to admit it. According to the latest figures, nearly 10% of banks' total loans are in arrears. That's the worst level on record (in other words, since 1962).
Everyone also knows that the Spanish government doesn't have enough money to stand behind the banking sector. That's why this summer, yields on ten-year Spanish government debt soared above the 7% "point of no return."
That forced ECB boss Mario Draghi to step in. Draghi promised to save the euro, whatever it took. He then said he'd be willing to print money to buy the bonds of troubled countries. The idea is that their borrowing costs would then be capped at affordable levels.
Of course, there would be conditions attached. Any country asking for such help would have to promise to reform itself so that it wouldn't end up in this trouble again. That would likely involve unpleasant things like austerity cuts and changes to the labour market.
And that's the problem that the Spanish prime minister is wrestling with. No national politician wants to be forced to make unpopular spending cuts at the behest of an external power. It's political suicide.
Spain's situation is made worse by the fact that it also has restive regional governments to contend with. For example, as Reuters reports, in Catalonia, "popular momentum for independence has never been stronger." The Catalans feel that they pay more in tax than is spent in their region. That's despite the fact that Catalonia has had to ask Madrid for a €5bn bailout to meet debt repayments.
The mere promise of aid from Draghi has helped to pull down Spain's borrowing costs. So it's very tempting to avoid asking for help. After all, the opposition parties would have a field day, blaming him for humiliating Spain.
But investors aren't entirely stupid. They know that this is exactly what Rajoy is thinking. So the longer he avoids biting the bullet, the higher bond yields will creep.
Forget national pride Europe wants to stick with the euro
Sovereign debt consultant Nicholas Spiro tells the BBC's Paul Mason: "We're in a situation where we finally have a half-credible bond-buying strategy at the ECB but Spain and Italy are loath to make use of it. The whole market rally has been predicated on Spain making use of it."
So what will Rajoy do?
In the long run, I still find it hard to see how Europe can hold it together. The Catalan example above is just one reason why. Many eurozone members have a hard enough time keeping their own countries intact, never mind building a super-state. What's the point in winning back power from a loathed national government, only to hand it over to Brussels?
But that of course, is a long-term argument. Europe as an entity has been tottering forwards since well before many of us were born, and we'll no doubt still be arguing about some form of integration many decades into the future.
We're talking about the short-term, immediate problem here. That's about what Spain will do right now. On that point, there's been a lot of commentary talking of Spanish national pride. Can the nation accept the humiliation?
To that I say: stereotypical tripe.
For an idea of what will happen, just look at Greece. Many people (I was one of them) thought that the Greeks had probably reached breaking point earlier this year.
There was rioting in the streets. The economy was and still is in a mess. They felt as if they were being forced into taking painful austerity measures by supercilious outsiders. If anyone was going to vote to throw off the yoke of the eurozone, it was them.
But they didn't. The Greeks feared leaving the euro more than they feared sticking with austerity. They decided it was better the devil they knew for now at least.
When push comes to shove, the Spanish will do the same, national pride or no. They might kick out the party in power and swap them for another bunch. But given the choice between keeping the euro or dumping it, they'll stick with the euro every time.
So I'd treat any pull back in peripheral eurozone shares between now and the bailout request as a buying opportunity. We've already covered the sorts of things we'd buy regularly in MoneyWeek magazine you can read the most recent eurozone story here.
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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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