EUR USD (1.2575) The euro was roiled yesterday on unconfirmed reports that eurozone governments are preparing contingency plans for an exit of a country from the bloc. It would be puzzling if officials thought it necessary to make it explicit given the obvious risks. It was even more puzzling that some thought market confidence could be enhanced by denying it. The main issue of the EU summit, however, was the question of eurobonds. Decision-making was put off to later but the overall impression is that they are firmly on the agenda. The ‘not unheated’ discussions reflect the various advantages and disadvantages that each country would face. For the core countries, higher debt services costs present a loss that they are unwilling to take without the accompanying assurances on stricter fiscal controls and supervision. But even here the cracks have emerged: the Austrian chancellor, for example, contradicted his own finance minister in endorsing the concept of eurobonds. However, who would be ‘for’ and who ‘against’ was obvious. The gaping omission in the whole debate is whether the core country leaders, like the IMF, actually believe debt mutualisation would solve the crisis. If they agree on this point, we suspect it is very likely that eurobonds will see the light of day. The euro undercut our 1.2610 support and is now vulnerable for a decline to 1.2490 and below that to 1.2380. The increase in the volatility on dips suggests that the market is not as prepared for weakness as the longevity of the crisis would have us think.
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Deutsche Bank