Flash: EU Head Fake?

 EU says it will consider allowing banks borrow directly from the ESM.  This is a head fake.  The ESM does not exist yet.  It is not ultimately the EU's decision.  The ECB and Germany will also have a say.  The reason that banks are unable to borrow directly from the ESM is that it lets the sovereign off the hook.  Borrowing from those facilities requires conditionality--austerity and/or structural reforms.  It may even require a treaty change even though not all countries have approved it yet.

There has been a quick bounce in the euro and other major currencies, but if my analysis is correct these gains will be short-lived.  Initial resistance in the euro is seen near $1.2480.  Sterling meets its hurdle near $1.5620.  The Australian dollar, which is also getting punished after disappointing with a 0.2% fall in retail sales may meet resistance near $0.9800.

The EU appears to be calling for a banking union.  It does illustrate efforts to have a re-boot of monetary union to strengthen it.  Investors should be prepared for more trial balloons in the coming weeks ahead of the EU summit at the end of June.

Consider the irony for Ireland.  If a direct bank support from a international entity existed, Ireland would not have needed aid in the first place.  On the other hand, important reforms might not have taken place either.

Color me skeptical.