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ESM Back In The Frame?

14 April 2016 by lberuti

Over the last few sessions, it has been all about financials. A string of news has contributed to crush banks' risk premia. First the Atlante fund was set up in Italy. The headline equity figure of €5bln is a drop in the ocean compared with the €360bln of bad loan in the Italian financial sector, but it should prove adequate to the most pressing concern: acting as a backstop for ECB-mandated capital raising of the weakest institutions. Then US banks that have reported Q2 earnings so far have surprised on the upside. In itself, it would never have triggered a rally, but at least they did not spoil the party. Then today the idea that the European Stability Mechanism (originally set up to help fund sovereigns) could be used to provide a credit line to troubled banks was floated by Italy and France. That proved too much for investors holding short risk positions on iTraxx Financials Senior (ITXES) and Subordinated (ITXEU) and they aggressively looked for a way out, sending ITXES 6.5bps tighter on the day and 14bps on the week to 87bps and ITXEU 17bps tighter on the day and 41bps on the week to 189bps.