A Tale of Two Governments

Eurosummit XIX update

Eurozone fears took Friday off as leaders announced a few developments at the European Council’s summit.

Perhaps the most significant announcement, at least in the near term, were a few particulars regarding Spain’s bank bailout. Leaders acceded to Spain’s formal bank bailout request and announced the troika’s loan will eventually take a back seat to private sovereign creditors. The latter issue—subordination—had seemingly weighed on private creditors since Spain first talked of seeking a bank bailout loan. This seems to have alleviated a good deal of fear among private-sector creditors, as it seems poised to put their claim on Spain (in the unlikely event they restructure) ahead of the troika’s.

Also, Ireland’s bailout program will be reviewed with the possibility it might be reworked to approximate Spain’s. Which seems to make sense considering Ireland’s issues—like Spain’s—were not driven by public debt, but bank bailouts. It remains to be seen if the loan’s terms and some enforced austerity are reversed, but it’s an interesting concept worth following.

In addition, leaders also discussed using the two bailout funds (the European Financial Stability Facility and the European Stability Mechanism) to automatically purchase sovereign debt when yields exceed predetermined levels. And last, they discussed establishing a single bank supervisor for the eurozone involving the ECB. We wouldn’t hold our breath waiting on these two to be finalized, but the plans are noteworthy nonetheless.

Overall, several interesting developments emerged from the summit—and several steps that seem positive. However, we stand by what we’ve written here often: The reason no quick, big bang fix the eurozone’s issues has been deployed is because it doesn’t exist. Nor is a quick fix needed or necessarily even desirable. In our view, gradually lifting or reducing fears is enough to help push stocks significantly higher.

Aussie government giveth, taketh away

On July 1, Australia’s government implements a carbon tax designed to reduce emissions from the heaviest polluters. Top carbon-emitting companies will be required to pay A$23 per ton of carbon, with the proceeds designed to support adoption of “greener” power sources.

The companies impacted—mostly coal-related firms and heavy industrial facilities—have long griped about this rule. And on Friday, Aussie Prime Minister Julia Gillard lent them a helping hand in the form of 90 million taxpayer dollars, funneled to the biggest polluters.

You’ve got that right: The Aussies are seeking to prop up polluters so they can tax them to reduce emissions.

Of course, they could just eliminate the new tax. But these complicated schemes are just so much more fun—and good politics! This way, the government can say they supported jobs (the impacted firms employ many), but still took action to reduce emissions. In reality, though, it’s more likely this scheme does neither very effectively.