G8 Procrastinates Again
In the absence of any fresh guidance out of the G8 Summit in Camp David, the euro has managed to stabilise in generally quiet, albeit nervous, trading. Canada’s CPI was the only data release of note on Friday, with the higher than expected April inflation prints (2.0% y/y headline, 2.1% core) serving to reinforce perceptions that the Bank of Canada will be able to start the normalisation process ahead of other major central banks – enough to send USDCAD lower initially. However, the heavy tone in the equity markets saw ‘risk off’ sentiment intensify, reversing the USDCAD move. Euro bulls are hoping that a growing sense of urgency will at least breed a more unified approach to the Eurozone crisis, given the considerable risks in the equation, which were underlined by Fitch’s downgrade of Greek banks to ‘CCC’ in the wake of the sovereign downgrade. Our European economics team estimates that in the case of a Greek exit from the euro, the cost to European taxpayers could amount to EUR225 bn or 1.8% of Eurozone GDP – almost four times the projected EUR60 bn (0.5% of Eurozone GDP) burden if Greece stays in the euro and undertakes what we would view as another inevitable debt restructuring. Of course, this only takes into account Greek debt write-downs, not such second-round effects as the threat of bank runs in other Eurozone countries. The ‘informal’ EU summit on May 23 will provide the next opportunity to discuss the latest intensification of the Eurozone crisis and prospective policy responses. Though euro bulls will hope that a growing sense of urgency will foster a more unified approach to the crisis, we maintain any ‘growth measures’ will be confined to supply-side structural reforms rather than demand-boosting steps from the fiscal side. Moreover, it would be too early to reasonably expect measures such as a Eurozone-wide deposit insurance system to be agreed. The lack of a bolder policy responses thus far threatens to dampen global growth and policy rate expectations to the benefit of the yen. Note the change in tone from the BoE’s Posen, who noted that it was “premature to think” that enough QE has been done – just ahead of the announcement that he will leave the MPC at the end of his term in August to rejoin the Peterson Institute as its new President from January 2013. Stay defensive.
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UBS Investment Bank