EUR USD (1.2575) The auction that saw Italy paying dearly for one-year borrowing reflects investors’ fears that the queue for bailouts and rescues is about to get longer. Mario Monti’s comment that Italy is paying twice, first for the bailout of other countries and then the high yields on its own bonds reflects his frustration with the market’s lack of recognition with his country’s fiscal efforts. It also suggests that he may look for rewards elsewhere, as in mutualised debt. However, investors are now beginning to demand higher premiums even for the hitherto ultra-safe bund. Fast moving markets are thus increasing pressure on policymakers to produce tools for crisis resolution. France is set to push for the use of ESM funds to recapitalise banks directly. However, sovereign debt subordination to bailout funds has already proved to be an undermining feature in the case of Spain, and so this approach might have limited support. The concept of a European Redemption Fund where all excess EMU debts could be pooled together for 20 years or more seems to be emerging as a compromise solution simply because such a sinking fund is likely to make countries like Germany more able to calculate risks. Notably, the Greek election deadline is now being seen as less crucial, as investors increasingly concede that a renegotiation of the Greek bailout and the deployment of one of these new tools may be necessary irrespective of the colour of the political coalition that emerges. The euro continues to be wedged in a broad trading range between 1.2310 and 1.2710.
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Deutsche Bank