EUR Tape Bombs to continue

In the wee hours of this morning in Brussels, all 17 members of the Euro zone and ‘aspiring’ future members, resolved to negotiate a “new” agreement alongside the EU treaty with a tougher deficit and debt regime to insulate the region against the debt crisis. The stricter budget rules will, however, leave the UK and Hungary in the cold. To achieve an agreement, EU leaders dropped their demand that investors share the cost of bailouts. This had been Germany’s biggest stumbling block for the past two-years.

The EU Summit agreement was largely in line with expectations and the draft report released yesterday, and it represents another step in the direction of an integrated fiscal “compact”. The acid-test will be, of course, if such an agreement could ignite sustained recovery in appetite for Spanish and periphery bonds (the ECB was buying bonds in the market this morning). Thus far, no one is sure whether the deal thrashed out overnight is really the big breakthrough hoped for before the summit, because the negotiations are still going on. On the face of it, probably not. The market needs to be convinced that the EU actions will be great enough to avoid a credit downgrade from the ratings agencies, which could come as early as next week.

The key features of the proposal:

  • Agreement on a semi automatic fiscal rule (in line with the Merkel-Sarkozy proposal earlier this week)
  • Bring forward the launch of the ESM to mid July 2012
  • Possibility of increasing the size of the ESM above +€500b to be discussed in March 2012
  • No PSI in the ESM as a precondition, but adherence to the “well established IMF principles and practices”
  • Voting by a qualified majority (85%) instead of unanimity for the emergency procedure in case of the ESM
  • Discussion about an IMF provision of an additional +€200b of resources – to be confirmed in 10 days

 

The UK and Hungary are not supporting the agreement ‘for now’, and so the accord is a Euro area plus one instead of being an EU one. Will the Euro region be able to avoid a recession after this accord? Most certainly not; as reported, these policy actions amount to ‘damage limitation’. The depth and breath of one will, of course, be debated. The only thing giving the market a late Euro lift is the Bundesbank saying it is ‘fundamentally open’ to bilateral loans to the IMF.

Now we will get to see how if North America like the EU progress.

Forex heatmap

Other Links:
ECB Cuts Interest Rates as Recession Fears Grow

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell