“Many pundits continue to miss the point on Europe. Germany desires only that member countries put their finances in order and they avoid moral hazard. Italy is a rich country and on a per capita wealth basis exceeds Germany even, but it is the people who have the money, not the sovereign. Italy is fully armed to address its problems should it want to. The question is whether the population wants to have reduction in their living standards to remain a member. Why should the Germans pay for the Italians? Hence, we will not see Eurobonds, nor increased SMP for a long, long time. And those hopeful for it are going to wait for a while. Sure, Martin Wolf et al are very right when they address the core issues of BoPayments etc, but the Italians have it within their remit to do that. Germany is asking everyone to become Germans in their habits. It may be a naive approach, but there is nothing else on the table. When we realise this, we will stop beating up the politicians setting the agenda and beat up the ones with the work to do. The German Diet is no moral hazard. Don't like it, go fund yourself!”

Eoin Treacy's view Thank you for this lucid email. These are sound proposals that need to be adopted in order to avoid future crises. However, what about this one? Greek and Portuguese spreads haven't pulled back nearly enough to suggest investors are confident they will remain part of the Euro. The European banking system is broken and needs to be recapitalised. Recent actions by the ECB in this regard are encouraging.

From 2008, we described the actions of the Fed as bailing out the banking sector via the yield curve. Short-term interest rates were slashed to the bone. Banks could borrow limitless amounts of cash via the discount window, posted mortgage bonds as collateral and invested the proceeds in long-dated Treasuries. This allowed them to harvest close to a 300 basis point spread until quite recently.

The ECB has attempted a different approach. It is making unlimited 3-year loans available via discount window and is accepting peripheral sovereign bonds as collateral. If I understand the process correctly, banks can purchase peripheral sovereign bonds at a discount in the open market, post them as collateral with the ECB where they are valued at par and take out new AAA rated loans. This might be described as bailing out the banks via sovereign spreads.

The Euro Stoxx Banks Index continues to range in the region of the 2009 lows and will need to sustain a move above the 110 area to break the progression of lower rally highs and suggest demand is returning to medium-term dominance.