Eurozone Deal Cleared

Currencies Direct July 22nd 2011 - 2 minute read

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.

Report By Phil Ryan

Written by
Currencies Direct

Select a topic: