Economic and Political Evolution in Europe - Forex Trading Update from FX Solutions

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Date: Sat, 6 Aug 2011 Time: 7:17 PM
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Joseph Trevisani, Chief Market Analyst at award-winning broker FX Solutions (http://www.fxsolutions.com/), provides forex traders with an overview of currency market activity and news on 22nd July 2011, including news of economic and political evolution.

"For the second time in fifteen months the European unity project, whose lineage goes back more than sixty years, has staved off collapse. The euro is saved, temporarily at least; the European Central Bank has bent to political reality; the Germans will continue to fund the European Union; and paradoxically perhaps, Europe has created financial institutions that will, over time, become the unified fiscal authorities necessary for the survival of the euro, the monetary union and the European Union itself.

The relief in Europe is palpable. Germany has won her point Greece will default on her debt, the lenders will bear some of the losses and not only the German taxpayer.

If the terms of the agreement on Greek debt are accurate it will be far more effective than last May's bailout because it addresses some of the specific problems, liquidity in the European banking system and interest rates for sovereign debt, instead of just lending funds to a bankrupt nation. Each of the major players, Germany, France and the European Central Bank has compromised insuring the essence of the current system.

The European Central Bank (ECB) will continue to accept sovereign debt as collateral, even if it is ruled in default by the rating agencies. The fig leaf is that the debt will be guaranteed by a national treasury. This will permit European banks to maintain liquidity access with compromised collateral. The ECB has been supplying large amounts of capital to Greek and other continental banks over the past year as deposits have drained out of the system.

The European Financial Stability Facility (EFSF) will be permitted to buy secondary market debt a la the original United States TARP plan. Much like the Federal Reserve in the Treasury market the EFSF will be able, if and when it deems necessary, to force prices higher and rates lower in the secondary debt markets. Just the knowledge that this power exists will help to ease European yields. It was the rise in Italian and Spanish rates over the past two week that precipitated the current stage of the crisis.

The rating agencies will not force a default judgment, no doubt they were consulted. Technical or selective default is the term being discussed but the key is that regulations can be changed. In addition the banks with the most exposure to questionable sovereign debt have reinforced reserves.

However, it is very premature to say the crisis is over. Interest rates for Greece, Ireland and Portugal indicate the credit markets are still closed to their refinancing. Spanish and Italian rates are much too high for credible budgeting.

If all of the pieces of the agreement fit together, if all the members of the EMU approve, and if the execution is funded then the crisis problem may well abate.

Yet the underlying and basic problem of economic growth and debt has not been addressed. If the Europeans do not find a way to promote economic growth and permanently trim entitlements, this crisis will return at some near or far future date."

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