Despite the Wednesday decision deadline looming large “the markets” are showing no signs of panic, the presumption from investors being that a satisfactory solution will be found. Despite the suggestion being aired by EU officials, that banks holding Greek debt may have to take up to 60% haircut on their bonds and other investments, the rationale appears to be that this level of losses would be contained and manageable.
Luxembourg’s Jean-Claude Juncker, who is leading the group of euro-area finance ministers, said yesterday that talks on private-sector involvement in a second aid package for Greece are focusing on losses of 50 percent to 60 percent. Italian, Portuguese and Spanish lenders will bear the brunt of a €100 billion plan to recapitalize European banks, while their counterparts in the U.K., Germany and France may avoid raising additional funds.
European policy makers meeting in Brussels tomorrow, in further talks on tackling the euro zone crisis, may force banks to boost their core Tier 1 capital to 9 percent of risk-weighted assets. UniCredit SpA, Italy’s largest bank, Banco Comercial Portugues, Portugal’s second-biggest, and Banco Bilbao Vizcaya Argentaria, Spain’s second largest, are amongst the banks analysts expect may have to raise the most capital.
German lawmakers secured a full parliamentary vote on any euro zone crisis measures negotiated, a move that risks delaying Europe’s response to its two-year debt problems. However, a further huge spanner could be thrown in the mechanics of the solution..
Chancellor Merkel will take a calculated risk on Wednesday by giving the German parliament a vote on the latest eurozone crisis measures, before she returns to Brussels to ‘sign off’ on any proposed deal. Members of German’s highly respected and deeply monetary conservative Bundestag demanded the right to scrutinise the package, including measures to “leverage” the €440bn European financial stability facility (the eurozone’s emergency rescue fund) before giving Ms Merkel a green light to agree anything at the second eurozone summit in four days.
With polls suggesting up to 80% of Germans are against baring the cost of any rescue package the German coalition will be resolute to ensure that investors bite the bullet and take the pain with regards to their disastrous Greek loans. Germany’s Economy Minister Philipp Roesler, who heads the FDP, told reporters yesterday;
[quote]Two conditions of the deliberations are vital for us: the upper limit of Germany’s 211 billion euros in guarantees can’t be increased and the EFSF mustn’t get a bank license. These conditions have been retained.[/quote]
Deutsche bank, a lender that has little direct exposure to a potential Greek default, has released trading figures this morning. Germany’s biggest bank had net income of €725 million euros after a loss of €1.21 billion in the year earlier period on write-downs related to the purchase of Deutsche Postbank. Analysts estimated a quarterly profit of 343 million euros. UBS AG, Switzerland’s biggest bank, posted a smaller decline in third-quarter profit than expected after an accounting gain cushioned a $2.3 billion loss from unauthorised trading. Net income fell 39 percent to 1.02 billion Swiss francs, the Zurich-based bank said today, beating analysts’ mean estimate of 318 million francs.
Markets
Asia/Pacific markets experienced mixed fortunes in overnight, early morning trade, the Nikkei closed down 0.92%, but the Hang Seng closed up 1.05% and the CSI closed up 1.89%. The ASX closed down 0.64%. the Thai markets moved up sharply the SET up 2.88%. In Europe the STOXX is currently down 0.46%, the FTSE is flat, the CAC is down 0.51%, the DAX is down 0.33%. Brent crude is currently flat and gold is up $6 per ounce. The SPX equity index future is currently flat.
Currencies
The euro has (so far) halted its five-day gain versus the dollar and yen as Europe’s banks begin to show their claws and dig in with politicians on the size of losses they will have to accept on their Greek bonds, lowering the likelihood of a deal at a summit tomorrow. The euro was little changed at $1.3928 at 9 a.m. London time, after rising to $1.3957 yesterday, the highest value since Sept. 8. The euro was at 105.99 yen from 106 yen yesterday. The USA dollar was virtually unchanged at 76.10 yen. New Zealand’s dollar weakened versus all sixteen of its major counterparts. The kiwi declined 0.3 percent to 80.50 U.S. cents, halting its previous three days of gains. The Dollar Index, which IntercontinentalExchange uses to track the ISA dollar versus a basket of its peers, including sterling, the euro and yen, fell 0.1 percent to 76.064.
Economic calendar releases that may affect afternoon market sentiment
14:00 US – S&P/Case-Shiller Home Price Indices August
15:00 US – Consumer Confidence October
15:00 US – House Price Index August
15:00 US – Richmond Fed Manufacturing Index October
Moving aside the house price indices the major data releases include consumer confidence in the USA, a Bloomberg survey of economists forecasts a figure of 46.5, as compared with the previous reading of 45.4. The Richmond fed expectation is for a median consensus of -1 from -6 previously.
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