The euro is going from strength to strength today in the aftermath of yesterday’s EU Summit package. Have EU leaders solved the problem? No, not by a long way but they exceeded expectations and the market has welcomed it with open arms. US and European equities are booming (the FTSE is over 2.5% up), as are riskier currencies such as the aussie dollar and the euro.
Decisions have been made on all three of the key issues of contention -bank recapitalisation, Greece’s debt burden, and the eurozone bailout fund. European banks will benefit from around €100bn worth of recapitalisation, in order to deal with losses stemming from Greece. On the Greek debt issue, a 50% haircut has been agreed. With regard to the bailout fund (the EFSF); it is to be expanded by almost five times next month (to around €1trn).
There were rumours of a lack of progress and delayed decisions throughout yesterday, so these plans have triggered a wave of positive trading throughout the financial markets. Concerns surrounding the various holes in the plans (How will the EFSF be leveraged? Are the haircuts really voluntary? What about eurozone growth?) have been put on the backburner for now but will undoubtedly resurface. There is plenty of negotiation ahead, which means plenty more disagreement and plenty more alarm bells. Italy remains very vulnerable in the debt markets and it still remains to be seen whether the decision to write down Greece’s debt will succeed in putting the country on a sustainable footing.
If the euro is to kick on further from here, the trigger is likely to come from outside. One method of expanding the EFSF is through external investment from countries like China or Brazil. It is no secret that Asian sovereigns are eager to diversify away from the dollar and into the euro, so such investment would make sense. It is not beyond EU leaders to fail to implement this plan, or for the deal to collapse altogether. The risk is there, but you have to say the recent deal certainly brightens the prospects of the euro in the longer-term.
Richard Driver
Analyst – Caxton FX
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