EUR still in danger but strengthens slightly
Hope has this morning evaporated that the Euro zone is close to finding a solution to the Sovereign debt crisis. Yesterday, I commented on speculation that there would be a three pronged attack involving the ECB, EFSF and Private Bond Holders. But, each of these prongs has now been bent out of shape by statements from European Policy makers.
Jean-Claude Trichet the head of the ECB, said that “interest rates had been set with a view to preserving stability in the euro zone”, although it could be argued that the word ‘core’ could be put in front of euro zone to give this statement more credibility. Trichet also called inflation expectations remarkably anchored, helping fight against the risk of inflation and the risk of deflation. This suggests the central bank is not preparing to reverse the two interest rate increases from April and July in October. Hence we have seen EUR strengthen a little even though this news is really negative.
German finance minister Wolfgang Schauble stated yesterday that, the possibility of increasing the EFSF through leverage was a “stupid idea”, as the result would be to endanger the AAA sovereign debt ratings of other member states. Now it may not be the best idea, but, at the moment the Euro zone appears devoid of any other ideas and if actions are not taken soon which shares the pain between the core and, the periphery then the Euro is at risk.
Finally, the FT has been reporting that European policy makers are split over the amount of private sector write downs which would be involved in any further Greek bail outs. So, the Euro crisis continues for another day with no end in sight and, you start to get the feeling that the same headlines will continue on a monthly basis until some new actions are announced. Meanwhile borrowing costs in Italy and Spain will continue to rise.