Daily Forex Brief | Europe likely to underwhelm once more

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Daily Forex Brief London: Wednesday 26th October 2011
Europe likely to underwhelm once more Given both the multitude and the complexities of the issues that Europe needs to address, expecting that all could be resolved by today was always an impossibility. Of course, the task has been made much harder by the exceptional financial constraints faced by most of the eurozone's sovereigns and Europe's clunky governance structure which significantly prolongs decision-making. As such, we can expect to be disappointed tomorrow. That said, it must also be conceded that steady and deliberate progress is being made on a number of fronts. On the EFSF, the proposal whereby the facility would set up a fund to guarantee bond-holder losses on new sovereign issuance appears to have gained sufficient acceptance, but as we have suggested previously, this is no more than simple financial alchemy. Critically, even if European leaders announce that the EFSF's capacity has been raised to, say, EUR 1trln, no European sovereign is being asked to contribute extra money in the near term. Another EFSF proposal that was circulating in Brussels last week was bringing forward the timetable for the temporary (EFSF) and permanent (ESM) rescue facilities to mid-next year. Discussion on this idea seems to have gone quiet and not surprisingly given that most of Europe's largest sovereigns simply will not have the cash to contribute fresh and hefty sums to the ESM by then. On the subject of potential non-European contributions to the EFSF from the likes of the IMF and the BRIC nations, this remains under discussion, although it is too soon to expect a definitive announcement on this today. Firstly, a number of the IMF's heavyweights, such as the US, Japan and the UK, pushed back against a suggestion two weeks ago that their contributions be lifted significantly in the short term. Secondly, the IMF would be extremely reticent about providing loans to sovereigns where they did not have preferred creditor status. And finally, the IMF would probably want a great deal of say in how the money was spent; if not, then it would certainly impose strict conditionality on how the funds were disbursed. A lot of water will need to pass under the bridge before this one is resolved. On Greek debt haircuts, reports suggest that the two sides are still far apart. European negotiators are attempting to convince the consortium of bondholders to accept a haircut to face value of 60%, which equates to a reduction in net present value (NPV) of over 75%. However, negotiators from the Institute of International Finance (charged with representing the bondholders) have offered a 'voluntary' reduction in NPV of 40%, up from 21% at the time of the July deal. On banking recapitalisation, it has been agreed that European banks needs to raise more than EUR 100bn of new capital, but there is likely to be little detail over who will provide this capital, because surely it will be very expensive and the private sector will be reluctant. With so many of these issues still in flux, Europe will try to talk up its response today in front of the assembled international media but unfortunately the substance will be lacking.
Also in today's Daily Forex Brief: UK rebalancing is working Equities unnoticed amidst euro-focus Read more...
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