EUR USD (1.2790) The European banking system is posing challenges which make the burden of any country exiting the eurozone even more troublesome. The bad banks loans in Spain have increased to €148 billion, making it urgent for the politicians to shape a concrete policy response. The G8 weekend meeting although did not deliver substantive measures, nevertheless echoed a notable shift in the discussions, possibly due to the presence of new faces (Francois Hollande) at the table. Although earlier, the expansion of paneurozone bank rescue vehicles were a taboo, the Spanish bank situation is now pushing the role of ESM to the heart of a bank recapitalisation programme. Similarly, the idea of debt mutualisation has now moved into the focus, making the concept of eurobonds not as remote and incongruent as earlier. Market commentators have added their calls for a more pro-active ECB. We reckon that as in the past they may reactivate their asset purchase programme without necessarily announcing it. All of these policies represent support of weaker members by the stronger and are therefore transfers. As the UK’s Deputy PM Clegg succinctly reminded: no common currency will work without transfer payments. On Friday morning, the euro plunged close to the January lows and then recovered brusquely, likely due to short covering. For now it is consolidating above 1.2610. A reliable stabilisation, though, can only be expected above 1.2920.
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Deutsche Bank