Forex Market Commentaries - Two Speed Europe

Can A Two Speed Europe Be The Route Forward, Or Will The Divisions Render It Unworkable?

Nov 18 • Market Commentaries • 7754 Views • 3 Comments

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UK Prime Minister David Cameron will be warned today that he risks creating an unstoppable momentum behind a “two-speed Europe”, which would be dominated by France and Germany, if Britain seeks to gain political advantage by making demands for too many concessions during the eurozone crisis. In a series of meetings in Berlin and Brussels, the UK prime minister will be advised that Britain should table modest proposals next year when EU leaders embark on a small treaty revision to underpin the euro.

Cameron will have breakfast in Brussels with José Manuel Barroso, the president of the European commission. He will then meet Herman Van Rompuy, the president of the European council, before flying to Berlin to meet Angela Merkel, the German chancellor.

Leading German magazine Der Spiegel reported that Berlin would like the European Court of Justice to take action against eurozone members that break the rules. A six-page German foreign ministry paper, published by Der Spiegel this week, calls for “a (‘small’) convention that is precisely limited in terms of content” to present proposals “rapidly”. These would then be agreed by all 27 members of the EU.

Merkel warned the prime minister at an emergency European council meeting in Brussels on 23 October that she would reluctantly have to side with France if Britain overplayed its hand in the negotiations. Nicolas Sarkozy, the French president, wants a treaty to be agreed among the 17 members of the eurozone, excluding Britain and the other nine EU members outside the single currency.

This would be seen as a major step towards the formalisation of a “two-speed Europe” in which France, Germany and the four other triple A-rated eurozone members would form an inner core. Britain and Denmark, the only two members of the EU with a legal opt-out from the euro, would form the backbone of an outer core.

Europe is running out of options to fix its debt crisis and it is now up to Italy and Greece to convince markets they can deliver the necessary austerity measures, Finnish Prime Minister Jyrki Katainen said.

The European Union cannot restore confidence in Greece and Italy if they don’t do it themselves. We can’t do anything to boost confidence in them. If there are doubts about these countries’ abilities to take sensible and correct decisions on economic policy, no one else can repair that.

Mapping out the possibility of euro exits Katainen said;

It should be discussed when the rules are revamped. It’s no medicine to fix this crisis. Finland can’t lull itself into thinking all is always well here. We must defend our credibility and the stability of our economy. The best guarantee for low yields is to keep our economy in good shape.

Finland and other AAA rated euro nations are becoming more outspoken in their opposition to expanding rescue measures for Europe’s most indebted members. German Chancellor Angela Merkel yesterday rejected French calls to force the European Central Bank to become a lender of last resort. Germany and Finland both oppose common euro bonds as a solution to the crisis.

World stocks fell again on Friday, extending the overnight slide, with renewed pressure on Spanish bonds reflecting fears that the euro zone’s debt crisis was spiraling out of control. Worries over the crisis also prompted investors to shed riskier commodities, after prices took their steepest tumble since September on Thursday.

Spain’s borrowing costs at a sale of 10-year debt soared to their highest in the euro’s history on Thursday, pulling it back into the vortex of a crisis that is increasingly threatening Europe’s second biggest economy France. The new 10-year Spanish bond was yielding 6.85 percent, with traders expecting more upward pressure before the country’s elections on Sunday.

Spanish banks, under pressure to cut property-backed debt, hold about 30 billion euros ($41 billion) of real estate that’s “unsellable,” according to a risk adviser to Banco Santander SA and five other lenders.

Spanish lenders hold 308 billion euros of real estate loans, about half of which are “troubled,” according to the Bank of Spain. The central bank tightened rules last year to force lenders to aside more reserves against property taken onto their books in exchange for unpaid debts, pressing them to sell assets rather than wait for the market to recover from a four- year decline.

 

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Spanish lenders hold 308 billion euros of real estate loans, about half of which are “troubled,” according to the Bank of Spain. The central bank tightened rules last year to force lenders to aside more reserves against property taken onto their books in exchange for unpaid debts, pressing them to sell assets rather than wait for the market to recover from a four- year decline.

Italy’s new government has announced far-reaching reforms in response to a European debt crisis that on Thursday pushed borrowing costs for France and Spain sharply higher, and brought tens of thousands of Greeks onto the streets of Athens. Italy’s new technocrat prime minister, Mario Monti, unveiled sweeping reforms to dig the country out of crisis and said Italians were confronting a “serious emergency.” Monti, who enjoys 75 percent support according to opinion polls, comfortably won a vote of confidence in his new government in the Senate on Thursday, by 281 votes to 25. He faces another confidence vote in the Chamber of Deputies, the lower house, on Friday, which he also expected to win comfortably.

Overview
The euro gained 0.5 percent to $1.3520 after falling the past four days. German Chancellor Angela Merkel rejected yesterday French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil. Merkel listed using the ECB as lender of last resort alongside joint euro-area bonds and a “snappy debt cut” as proposals that won’t work.

Copper dropped 0.3 percent to $7,519.25 a metric ton, having fallen as much as 2.1 percent today. The metal is set for a 1.6 percent decline this week, the third weekly drop. Zinc weakened 0.7 percent to $1,913 a ton and nickel lost 1.1 percent to $17,870.

Market snapshot 10am GMT (UK)

Asian markets closed down in overnight early morning trade. The Nikkei closed down 1.23%, the Hang Seng closed down 1.73% and the CSI closed down 2.09%. The Australian index, the ASX 200 closed down 1.91% for the day, down 9.98% year on year.

European bourses have recovered some of the earlier opening losses, the STOXX is currently flat, the UK FTSE is down 0.52%, the CAC down 0.11% and the DAX down 0.21%. The PSX equity future is currently up 0.52% responding to optimism that the U.S. economy may end 2011 growing at its fastest clip in 18 months as analysts increase their forecasts for the fourth quarter just a few months after a slowdown raised concern among investors. Brent crude is currently up $116 a barrel with spot gold up $6 an ounce.

There are no significant data realises this afternoon that may affect market sentiment.

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