Currencies DirectDecember 2012 Newsletter

Written By Davide Ugolini
Currencies Direct

At yet another European marathon-style meeting euro zone finance ministers and the IMF finally reached a deal on another bailout for Greece, agreeing to cut debt by 40bn and releasing the bailout tranche to cash strapped Greek government. The details of the bailout failed to impress investors and analysts, who are not entirely convinced if this is yet another can-kicking exercise and worry that Greece might come back to haunt the markets in the future. Overall Greece will receive 43.7bn Euros in a series of instalments from the Troika. The ECB agreed to hand back 11bn in profits it made on Greek bonds and the EU and IMF will provide the remainder with the hope of reducing Greek debt to 124% of GDP by 2020.

Despite all the uncertainty and doom and gloom hovering around the Euro zone, a Christmas feeling seems to be in the air and economic morale at the end of November has improved for the first time in almost a year. The Euro zone officially fell into another recession in July-September despite France and Germany showing resilience and managing to beat consensus and grow in Q3, it was not enough to stop Europe as a whole contracting. The road to recovery will be long, but recognition that the worst may now be behind us is lifting sentiment into the new year.

Concerns about Germany being dragged into the economic mire have also eased and certainly contributed to the feel good factor in the markets at the end of November! Economic activity in Germany seems to have stabilized though it is not yet expanding. Another slice of good news comes from the bond markets, where debt servicing costs of peripheral countries continued their journey south. Italy saw its costs at a two year low and demand has remained robust in November debt auction. The news should help alleviate any financing concerns for Italy and reduce its debt service burden while its economy remains in recession and revenue from growth seems highly unlikely.

While the Euro zone seems to be out of the woods for the time being, the President of the European Commission Jose Manuel Barroso is urging everyone to counter the crisis of confidence and has unveiled plans for the Euro zone to gradually acquire the powers of a national government with a single treasury and the right to tax or issue commonly backed bonds. Details of the fund, which should eventually grow to a full scale treasury, are at best sketchy at this stage and we know that any measure will have to go through a painstakingly slow legislative process and changes to the EU treatise will also be required.

Despite a slight overall improvement and having solved the temporary financing issues, downside risks are still very real and if economic data from the core of the Euro zone begins to disappoint then markets will begin feeling very jittery again. We can expect investors to remain nervous about the Euro zone in 2013 but we hope that news from Europe will be less intense. With Greece off the radar, all eyes will turn next year to the much larger economies of France and Spain. Will Madrid eventually ask for a bailout? and will France, which has been stripped of its priced AAA rating by Moody’s in November, embrace reforms to slash red tape and shake up its economy and cut its public deficit?  We have still much to digest as we move into the new year but for the moment we have some temporary relief in the Eurozone.

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