MacroScope

Greek firewall looks porous

The second Greek bailout was aimed at ring-fencing euro zone contagion, but could unleash it instead.

Comments from rating agencies since euro zone leaders agreed to involve the private sector in a  Greek rescue plan suggest last week’s events have increased rather than decreased the risk of contagion in the medium-term, says Gary Jenkins of Evolution Securities.

Fitch ratings stated on Friday:

If the Irish and Portuguese economies and public finances are not firmly on a sustainable path going into 2013, when both will need to regain access to medium-term market funding, the potential precedent set by PSI (private-sector involvement) in the Greek package will be incorporated into Fitch’s assessment of the risks to bondholders and reflected in its sovereign rating opinions and actions.

Moody’s said Ireland and Portugal were likely “credit-neutral” but highlighted  ”the negative implications of this precedent-setting package” on countries that may come to face similar challenges.  “For creditors of such countries, the negatives will outweigh the positives and weigh on ratings in future,” Moody’s said.

Markets were all too aware of the dangers of contagion last week when yields on 10-year Italian and Spanish bonds rose beyond 6 percent, towards levels  (around 7 percent) beyond which funding costs are perceived to be unsustainable.

from Global Investing:

Jean-Claude Trichet, EM c.bankers’ new friend

What a friend emerging central bankers have in Jean-Claude Trichet. Last month the ECB boss stopped euro bears in their tracks by unexpectedly signalling concern over inflation in the euro zone. Since then the euro has pushed steadily higher  -- against the dollar of course, but also against emerging currencies. The bet now is that interest rates -- and the yield on euro investments -- will start rising some time this year, possibly as early as this summer.

That's ptrichetrovided some relief to central banks in the developing world who have struggled for months to stem the relentless rise in their currencies.

Being short euro versus emerging currencies was a popular investment theme at the start of 2011, partly because of EM strength but also because of the euro zone debt crisis. "What that also means is that people who were short euro against emerging currencies had to get out of those positions really fast," says Manik Narain, a strategist at investment bank UBS. Check out the Turkish lira -- that's fallen around 5 percent against the euro since Trichet's Jan 13 comments and is at the highest in over a year. South Africa's rand is down 6 percent too. Moves in other crosses have been less dramatic but the euro's star is definitely in the ascendant. The short EM trade versus the euro  has more room to run, Narain reckons.

from Global Investing:

What fund managers think

Bank of America-Merrill Lynch's monthly poll of around 200 fund managers had a few nuggets in the June version, aside from the usual mood-taking.

Gold is too expensive.  A net 27 percent of respondent thought it overvalued, up from 13 percent in May. Then again, the respondents to this poll have reckoned gold is too pricey since September 2009.

The fall in the euro should be tailing off. A net 14 percent reckon the single currency is still overvalued, but that is way down from the net 45 percent who thought so in the May poll.

ECB’s Stark takes aim at euro bears, rating agencies

Reuters/Ralph Orlowski

Reuters/Ralph Orlowski

Top European Central Bank policymaker Juergen Stark took aim at investors and ratings agencies for playing up worries about the future of the euro zone, accusing credit agencies of irresponsible behaviour and saying there was “no alternative” to the single currency.

“Markets are clearly, in the current circumstances, overshooting,” he told a Reuters Insider panel discussion in Frankfurt, saying investors were not taking the region’s economic fundamentals into account when they drove down the euro and drove up the cost of some countries’ debt.

Credit rating agencies compounded the problem by downgrading countries even as they announced ambitious plans to cut costs and debt, he said, pointing darkly to the possibility of  “vested interests” at work.

Upcoming live video: ECB board member Jüergen Stark debates future of the euro

A demonstrator burns a five euro note during a protest in downtown Madrid against capitalism and the G20 Summit on Financial Markets and the World Economy November 15, 2008. REUTERS/Susana Ver

Join us at 9 a.m. GMT on Friday (5 a.m. ET) for a live Reuters debate with ECB board member Jüergen Stark, “Is there a future for the euro?” After a period of turmoil for the European currency, the debate will be a timely reflection on where the currency goes next. Joining Stark will be Thomas Mayer, chief economist at Deutsche Bank, and Volker Wieland, professor of monetary policy at Goethe University in Frankfurt. You can watch the event live here. We’ll post a recording of the event on the same URL shortly after.

No split up for euro zone in near-term at least

The euro zone sovereign debt crisis has not made a near-term collapse of the bloc any more  likely, a survey on hihifrds.com, a website devoted to the Thomson Reuters FX and money markets trading community, suggests.

The survey asked whether all 16 countries currently using the euro would still be doing so by the end of 2012. Fully 88 percent of respondents said they would.

Maybe the 16 euro zone members are tied to the single currency for now but others have more choice. Russian President Dmitry Medvedev and  his Brazilian counterpart Luiz Inacio Lula da Silva have  agreed to consider how to make more use  of their own currencies in bilateral trade, rather than the euro or dollar.

Frustrated Greeks

The Greek debt crisis appears to be entering a new phase, in which the country is no longer just waiting to get needed help but getting concerned that others — including euro zone powerhouse Germany — may actually be making it hard for them to recover.

First, there is Prime Minister George Papandreou (right in photo). His concern is that speculators are pushing  the cost of borrowing so high that it is undermining the plans he has put in place  for deficit reduction.  Papandreou is known for being a mild-mannered sort, so any kind of irritability is worth noting.Greeks

But Theodoros Pangalos (left), the deputy prime minister and once foreign minister, has no such reputation to hold him back.   He has launched an attack on Germany, saying that a) it is allowing its banks to mess around with Greek bonds and b) that it suits Berlin in any case to let the euro fall.

Brit shock horror: euro to survive

Euro brezinys_EC1

Britons have never really got the euro zone. “Its not really going to happen, is it?” was a typical question from a City analyst to Reuters back in the mid-90s. The political drive behind the creation of the monetary union was beyond many in eurosceptic Britain.

So the results of a straw poll at an event sponsored by independent City advisers Lombard Street Research were somewhat suprising.  A hundred or so mainly British investors were asked whether the euro would be around in five years with its current membership. Response was about 80 percent saying yes to 20 percent saying no.

The event involved a debate on Europe’s economy between Lombard St’s Charles Dumas and Bank of America Merrill Lynch’s Holger Schmieding.

from Global News Journal:

What flesh will be put on the bones of an EMF?

In the space of a few weeks, the idea of creating a European Monetary Fund to rescue financially troubled EU member states has gone from being a high-level brainwave from a pair of economists to a major policy initiative backed by powerbroker Germany. In EU terms, that's Formula One fast.

Yet while German Chancellor Angela Merkel appears to be behind the concept, even if she has concerns about a possible need to change the EU's treaty, no one has put much flesh on the bones of the idea apart from the original proponents -- Daniel Gros of the Centre for European Policy Studies and Thomas Mayer, the chief economist of Deutsche Bank.

Gros and Mayer set out their proposal in an academic paper and synthesised it in a column in The Economist last month. In essence the idea -- and it remains to be seen if EU policymakers take it up wholesale or develop something along different lines -- is fairly straightforward.

Lack of debt Estonia’s undoing?

tallinnsonganddance

Low public debt would usually be a good thing, but it might throw a spanner in the works of Estonia‘s quest to join the euro zone.

The small Baltic country has a stable currency, its deficits and inflation meet European Union rules, and its top policymakers exude confidence the country will adopt the euro next year.

But with government debt below 10 percent of gross domestic product (GDP), Estonia has not needed to issue a benchmark bond — a government bond issued in Estonian kroons for at least 10 years — which it could use to show it has low and stable interest rates, one criteria for euro candidates.