euro

The state of the escalating eurozone sovereign debt and banking crises will remain the primary theme in the FX market this Monday, as Sarkozy and Merkel are scheduled to meet in Berlin at 12:30GMT to further discuss the new rulebook on the agreed fiscal discipline pact. Analysts are not looking for anything concrete or special to come out of it. Joint press conference expected around 1:30 GMT.

“There is an outside chance the two leaders will try and surprise the markets with euro-supporting comments regarding the possible issuance of common/joint Eurobonds - but that is unlikely” John Noonan, Head of IFR Markets commented.
“They urgently need to formulate and clearly communicate a vision for a sound and stable euro area that deserves the name fiscal compact,” Thomas Harjes, senior European economist at Barclays Capital in Frankfurt was quoted as saying in Bloomberg.

Another pressing issue facing the Eurozone this week will be to ease uncertainty over risk of contagion coming from a hot new front, as Hungary officials travel to the US seeking a new financial lifeline that may help the country to avoid a potential default on its debt; it has been reported that both Italy and Austria have a direct exposure to Hungary's obligations.

"The Washington based lender is now hardly likely to reach an agreement with the Hungarian government, until after the path has been cleared at the Brussel’s level" says Edward Hugh from EconoMonitor.

European Commission President Jose Manuel Barroso has recently written to the Hungarian PM Mr. Orban asking to withdraw the legislation on the central bank, which may hurt its independence, as well as a ‘stability law’ proposed earlier this month. Unfortunately, so far Orban has ignored Barroso’s plea, since the bill went into law on 30 December.

Over the weekend, Lagarde said to be looking forward to meeting Hungarian officials who will arrive at the IMF in the coming days.

As read in Reuters: "We are obviously very concerned that whatever Hungarian legislation is voted by the Hungarian authorities is in compliance with the European requirements," she said.

"We are looking into it, I know that the European Commission is looking into it, and I certainly hope that the Hungarian authorities will be very keen to have their legislation in compliance with European regulation as well, particularly when it concerns the independence of their central bank," she added.

Last Friday, Fitch rating agency downgraded Hungary by one notch to BB+, with a negative outlook. "The downgrade of Hungary's ratings reflects further deterioration in the country's fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF/EU deal," explained Matteo Napolitano, Director in Fitch's Sovereign Group. 


Italian PM discards new austerity plan

Italian Prime Minister Mario Monti Sunday ruled out a new austerity plan, reaffirming his belief that previous measures undertaken are enough to achieve the country's economic targets. Monti was interviewed Sunday night on the state-owned RAI television network.

As read in Dow Jones: "Italy will run a balanced budget by 2013 and a primary surplus of 5% of gross domestic product that year, probably the highest in the euro area, Monti said Sunday. Monti confirmed he will meet German Chancellor Angela Merkel Wednesday to persuade her that Italy will fulfill the austerity obligations it has undertaken."


The EZ remains deeply divided on Greek haircuts

Meanwhile, in Greece, after ECB's Athanasios Orphanides urged EU officials not to press private Greek debt holders to accept losses, Clemens Fuest, an adviser to Germany's finance minister Schaeuble told a Greek newspaper that a 50% write-down on Greek debt holdings is not enough, arguing that Greek debt haircut should be higher.

Fuest added: "To my view, Greece has already defaulted," he said. "I believe that the best thing would be if one honestly says that the Greek government cannot repay its debt. In such a way, a better settlement could be achieved".