Eurozone deal cleared

It appears as though the EU ministers’ main concern was to come up with something, anything, that would settle the markets and effectively ring-fence Greece so that contagion of debt concerns did not occur. The summit therefore did not disappoint with an agreed Euro 109 billion bailout emerging for Greece and statements that the European Financial Stability Fund would potentially be able to purchase sovereign debt in the secondary market and also have the ability to recapitalise Eurozone banks should the need arise. In addition, private sector involvement in the bail-out was agreed with banks offering Greece longer maturities at improved rates on existing debt, to the tune of up to Euro 50 billion. All very nice, although it is still not really clear how the latter is going to work and probably more important, how these changes will be viewed by the ratings agencies. I feel that the EU hierarchy has already privately accepted that some degree of selective default will be forthcoming – the severity of default assessment will be all-important.

So, is the agreement the first steps in a long term solution that will establish a new Eurozone authority which will encompass fiscal consolidation and system wide risk management – I wonder if they will call it Bundesbank? – or will it emerge that it is just one huge sugar fix for the market. Certainly, early reaction is just that. The Euro surges, peripheral Eurozone bond yield crash and equity prices rise… All is rosy in the garden again, but the situation could turn again very quickly if analysis and expectation takes a turn for the worse. Let’s wait for Moody’s, S&P and Fitch over the next few days….

Outside that, there has been little change. Growth remains subdued in the UK, in the Eurozone and in the US with little likelihood of a pick-up this year. The Eurozone did look as though it would break this mould but recent German IFO and French and German manufacturing PMI numbers suggest that this is not to be. Official interest rates in these regions will therefore remain low for longer (although the ECB are still expected to tweak Euro rates a little higher in the Autumn) which will imply continued strength for the Swiss Franc and Yen (of the majors) and the Aussie, Kiwi and Canadian Dollars (of the rest) – all 3 of which are expected to put rates up, probably more than once, over the next 6-months.

Today’s data fix takes the form of German IFO survey release (already out, and coming through on the weakish side) and then some Canadian numbers, 1st tier but largely peripheral to the bigger picture. Traders will remain focused on yesterday’s softer than expected US jobless claims and the ongoing discussions in Washington to try and solve the US government’s debt ceiling problem. Approaching the weekend, all these factors are likely to keep the lid on further Euro gains but in the same vein, will negate any great urge to push it lower.