Daily Forex Brief | Deepening financial potholes in Europe

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Daily Forex Brief London: Tuesday 25th October 2011
Europe's deepening financial potholes If European leaders hoped that the progress they had made over the weekend might help to placate investors and traders, then Monday's price action should send them back to the drawing board. After reaching a high early on of 1.3954, the euro fell back by more than one big figure by late morning as the consensus developing was that Europe's policy-makers were still two steps behind. Bond spreads for troubled sovereigns continued to widen relative to German bunds, with the IT/GER 10yr government bond spread out another 13bp to 390bp at one stage. France is not off the hook either ? the FR/GER 10yr spread widened another 5bp to 118bp. European leaders made a brave fist of attempting to resolve their differences over a solution to the worsening sovereign debt and banking crisis over the weekend, but unfortunately it appears that they will again underwhelm when they announce details of their response on Wednesday. In some respects, such is the incredible pace with which underlying circumstances are shifting that Europe's key policy-makers are struggling to catch up. Indeed, one is reminded of the little boy using his fingers to attempt to plug holes in a dike ? eventually, he runs out of fingers, and, even worse, his fingers just aren't big enough to fill the holes. Most critically, some progress has been made on raising the EFSF's firepower but plans are at a very early stage and could still unravel. On Saturday, eurozone finance officials were shocked to learn that the size of the fiscal black hole in Greece could be as much as EUR 252bln between now and 2020 unless bond-holders can be convinced to share the burden. This would absorb virtually all of the EFSF's remaining financial resources, leaving almost nothing for any other bailouts, secondary bond-market purchases or banking recapitalisation. In essence, as succinctly stated by the Dutch Finance Minister, European leaders need "to get real" about increasing the size of the bailout facility. Talk that the EFSF could set up an SPV designed to attract funds from the IMF, BRIC nations and/or sovereign wealth funds are somewhat reassuring, and one of the major sources of optimism to come out of the weekend gab-fest. Without non-European participation in the EFSF, European leaders seem incapable of finding a way to properly supply the facility with the funds that it so desperately requires.
Also in today's Daily Forex Brief: Europe's darkening growth picture Japan's currency threats become even more audible The clamour for more Fed QE Read more...
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