- Friday optimism once again gives way to disappointment
FX markets showed a little more stability on Friday, but once again this has proven temporary. Reports that EU officials were contemplating bringing forward the creation of the ESM (successor to the EFSF) to 2012, and that it would have capital of EUR500bn, helped drive optimism that something positive might be forthcoming from the weekend international gatherings. Indeed, ECB President Trichet speaking in Washington just ahead of the NY close, acknowledged the scale of sovereign stress in the Eurozone. He emphasised the need for bank recapitalisation ‘in a very active way’. In the event, there was little concrete from the G20/IMF. But over the weekend the UK Telegraph reported on a comprehensive plan involving bank recapitalisation and further EFSF expansion. Markets opened higher on the back of this, but there is little evidence that European political opposition to further bailouts has evaporated over the weekend. The French Finance Ministry and Central Bank Governor Noyer have denied any such plan and indeed more importantly continue to insist that there is no need for bank recapitalisation. German opposition to a Greek default remains absolute; and there are also significant legal objections to the leveraging up of the EFSF. Unless there is new evidence that both Germany and France are willing to shift from their long-held positions, risk is likely to remain under pressure. In the meantime, the liquidation trade continues: while the collapse in gold has been exacerbated by an increase in CME margin requirements, the fall was already underway. This, and indications that some real money managers took full advantage of central bank USD selling to exit short dollar positions, tells us that there is still the potential for further large scale liquidation of EM exposures and, with that, further USD upside.
- Greece, EFSF progress is necessary but perhaps not sufficient
This week, the immediate challenge will be Tuesday’s Greek parliamentary vote to approve the new property tax as one condition of receiving the next tranche of EU/IMF funding. It must pass or a euro calamity follows. Thursday sees the German vote on the expanded EFSF, but given the support of the opposition SPD, passage should be a formality. Market relief may nevertheless be palpable. Austria gives its verdict on the EFSF on Tuesday and Finland on Wednesday. These are all stepping stones that must be crossed without incident if the euro is to trade with more stability. Market focus may now be on the approval of the next tranche of aid; but more important is the decision on the PSI swap, due after the EFSF ratification process is completed. At the heart of the issue is that if the decision is made to proceed with the second bailout, then Europe loses much of the remaining leverage that it has over Greece: most of the second bailout funds will be disbursed as part of the PSI swap at the beginning of that programme; hence the extreme pressure currently being applied to Greece. But equally, if the IMF agrees to disburse the next tranche, it too loses whatever leverage it has on European politicians. The IMF has made it clear that it favours recapitalisation of the banking sector; European politicians have made their opposition just as clear. By threatening to withhold IMF approval of the next tranche of aid – without which European participation would be politically extremely problematic – might it be able to force Europe into taking steps to strengthen the system? The current assumption is that Greece runs out of cash in the face of redemptions on 14 and 21 October. But does that deadline also force European action on bank recapitalisation at the same time?
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/09/Daily-FX-Str_Europe_26Sept2011.pdf
BNP Paribas
Corporate & Investment Banking