The markets are nervously awaiting the release of the European bank stress tests today. In recent months, the European Central Bank (ECB) has been sifting through the books of banks in the euro area to test whether they have sufficient capital to withstand future market shocks.
This is not the first time the ECB have undertaking such work, with the last stress tests being published in July 2010. These results were widely criticised as lacking credibility, when all the Irish banks passed for the Irish banking system to subsequently collapse only four months later! Watch this release closely, as if a number of banks fail it has the potential to further reduce confidence in the EU’s ability to manage the debt crisis.
Italy made some progress in its efforts to avoid being dragged into the contagion on Thursday, with a 45 billion euro austerity package fast tracked through the Senate. The final hurdle will be the parliament vote today and despite Mr Berlusconi’s political unpopularity, it is expected to be passed.
Staying on the subject of debt, another rating agency has put the US on negative credit watch, with S & P’s announcement coming a day after a similar move by Moody’s. The S&P rating agency specified there is a 50% chance that it could cut the US rating within 3 months. If this was to materialise, the cost of servicing America’s $14.29 trillion – yes trillion – would rise still further.
In overnight markets, traders were focussed on the bank stress test announcement, with sterling/euro reaching 1.1432 before falling back to 1.1386. If reports this morning are accurate, 10 out of the 91 banks are expected to fail the stress tests, including a clutch of small Spanish savings banks and up to three Greek banks. Expect significant volatility in the Euro if the results different greatly from this number.
The pound also slipped against dollar in morning trading to 1.6099, with risk aversion as a result of the Euro debt crisis and the US on watch for a credit downgrade leading investors to buy the ‘safe haven’ dollar.
What does this all mean for me? Well buying your EUR, USD, AUD or any other currency at the wrong time could cost you a fortune. There is no crystal ball but Currency UK can give you the information you need to make an informed decision.
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