Forex Market Commentaries - Eurozone Ligh Bulb Moment

The Light Bulb Moment, Or Will The Last Person Left in Europe Please Switch The Lights Off

Oct 21 • Market Commentaries • 4877 Views • 1 Comment on The Light Bulb Moment, Or Will The Last Person Left in Europe Please Switch The Lights Off

You have to wonder if all the spin and posturing has been worth it given that sixteen year olds in the UK with a C grade in GSCE maths could have told the great and the good at the countless; troika, EU and IMF meetings held over the past few months that the €440 billion bailout fund wasn’t enough. In reality the ‘stability fund’ with that level of fire-power would have only covered Greece’s default, but when the other shoes drop (and they will) of Spain, Italy and France then the vaults would have been empty.

In one sense it’s admirable that Germany is urging great caution on the measure to leverage the fund to up to five times its capital base, it’s not that ghosts of the Weimar republic still stalk the Germany mentality, it’s a question of sound management and prudence. The French want to accelerate the leveraging of the fund, this would by proxy deliver lending powers to central banks, a situation that Germany is keen to avoid. However, despite their reticence and stance as a counter weight to the argument the fund is either leveraged or there is no resolution on the horizon, it really is that black and white and hopefully this weekend’s and Wednesday’s meetings can finally resolve the issue.

If the various powerful bodies want; stability, the ability to step in and rescue other PIIGS nations as they approach default then €440 billion is not enough. It’s unlikely that the more modest figure mentioned overnight and this morning of €1.5 trillion is sufficient, however, as a ‘political’ compromise perhaps that’s where the common ground is to be and has to be found. With that level of support it’s inevitable that the various powers will be back to the table inside two years and no doubt the kicking the can down the road metaphors will be used again, but contagion has to be avoided.

The European Central Bank can also assist the overall stability by lending more money versus asset-backed bonds if issuers provide additional information about the loans underpinning the securities. Banks can borrow money from the ECB’s liquidity facility by posting collateral, with a discount applied depending on its perceived safety. The ECB is considering ways to improve disclosure in the asset-backed securities market at a time when European government ministers meet in Brussels to try and find a solution to the region’s sovereign debt crisis.

The race for cash among foreign banks in China is at boiling point as some newcomers, particularly European banks, struggle to gather the necessary yuan deposits in order to meet the regulatory requirement that becomes policy at the end of the year. The Chinese Banking Regulatory Commission (CBRC) requires all domestic and foreign banks in China to have an LDR (loan to deposit ratio) of 75 percent or less, loans they have made should not exceed 75 percent of total deposits they have received, as at December 31, as the grace period on a policy announced in 2006 comes to an end.

Approx. 40 foreign banks have set up locally incorporated units in China since 2007 hoping to capitalise on the boom in the world’s second-biggest economy. As of end-2010, the average LDR of 29 foreign banks that disclosed the figure was at 102 percent, according a report by PricewaterhouseCoopers. That compared with an average of 150 percent at end-2009. The European Union Chamber of Commerce in China, in its 2011/21 position paper published last month, called on Beijing to either replace the requirement with an alternative measure or give a longer grace period for late-comers. It believes the adverse effect on the operations of small-medium sized foreign banks is particularly disastrous, they only have a small branch network, thus limiting their ability to gather deposits from the broader public.

Having got ahead of its own curve by announcing more QE the Bank of England’s MPC has arguably acted decisively to ward of the inevitable double dip recession that was so feared. The subject of QE is once again raised in the USA. Two Federal Reserve officials are insisting that the U.S. central bank should consider resuming the controversial large-scale mortgage bond purchases to support the fragile USA economic recovery. Perhaps the UK has been the unknowing catalyst and US policy makers may be keeping a keen eye on the Eurozone solution believing that any further expansion on a QE policy from Europe would give scope for the Fed to inflate.


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The Fed bought $1.25 trillion worth of mortgage-related debt, starting in 2009. The Fed at its September meeting said it will replace $400 billion of short-term securities on its portfolio with longer term ones to push longer-term interest rates lower, known as Operation Twist. It will also replenish its holdings of mortgage-related debt to support the depressed housing market. Operation Twist was the latest in a long series of extraordinary steps to boost growth through a financial panic and deep contraction. The Fed cut rates to near zero almost three years ago and announced in August rates would likely stay that low through the middle of 2013. The central bank also bought $2.3 trillion in securities to encourage borrowing.

Asia/Pacific markets were flat and or stable in early morning overnight trading. The Nikkei closed down 0.04%, the Hang Seng closed up 0.24% and the CSI closed down 0.5%. The ASX 200 closed down 0.07% and the SET is up 1.21%. The STOXX is up 1.0% the FTSE up 0.81%, the CAC up 1.05% and the DAX up 0.51%, naturally optimism that the various EU meetings will resolve the debt crisis has brought relative calm to the markets this morning. The SPX equity index future is currently up circa 0.3% Brent crude is down $18 a barrel and gold up $3 an ounce.

In early trading the euro fell for the first time in four days versus the dollar and yen as concern European policy makers will struggle to come up with a comprehensive plan to resolve the debt crisis hit demand for the Eurozone’s assets. The euro dropped 0.4 percent to $1.3730 at 9:35 a.m. London time, heading for a 1.1 percent loss this week. The currency fell 0.5 percent to 105.29 yen, and fell 0.5 percent to 1.2252 francs. The yen was little changed at 76.71 per dollar. However, the euro and sterling has recovered in mid morning trade as news with regards to a euro solution intensifies.

The euro is currently flat versus its major counter parties. Sterling rose versus the euro gaining 0.2 percent to 87.07 pence per euro at 9:01 a.m. London time, having appreciated 0.8 percent this week. It was little changed at $1.5787, and declined 0.2 percent to 121.07 yen. The pound has weakened 1.2 percent in the past six months, according to the Bloomberg Correlation-Weighted Indexes, which measure a basket of 10 developed-market currencies. U.K. government debt has returned 12 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, surpassing the 7.2 percent return for German bunds and 7.9 percent gain for U.S. Treasuries.

There are no significant economic data releases at or shortly after the New York opening that are likely to affect market sentiment.

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