Okay, we finished today our European issue of the What's up, Forex Doc? Midyear Check Up series. Ivan Delgado, FXstreet.com, has done a great job with this paper about the Eurozone situation. I will recommended you the last topic Ivan touch called "Chances of a Euro break-up," it will give you some scoops about 2012 for sure.
FXstreet.com complete today the research, Here after you will find the topics Ivan has covered and their schedule and below that, you have the third chapter of the Eurozone six month update.First Chapter:
- EU summit on July 21; plans backfire in no time
- Italy, Spain bonds joining the party
- Different governments, same problems
- No country immune to downgrades
- Eurozone crisis arrives to Germany
- Doors for QE temporarily shut down; non committal to further bond buying efforts
- A more pragmatic ECB cut rates
- Proposal for Euro bonds issuance
- Role of the IMF
- The messy EFSF leads to an ESM early start
- Sense of failure on the Dec 8-9 EU summit
- Chances of a Euro break-up
Euro crisis reaches critical territory - Final Chapter
By Ivan Delgado Egea, Analyst for Fxstreet.com
Role of the IMF
Amid the explosion of the debt crisis, pressure built over the IMF shoulders, questioned to do more to strengthen its role as saviour to curve debt contagion within the Euro region.
Leaders explicitly imploded greater help from the IMF after the Nov 29 EU meeting. The northern bloc, led by Germany, Finland and the Netherlands were conscious of the need to build up a stronger firewall, thus called for an enhanced and strengthened role by which the IMF would increase its resources to facilitate assistance to Spain or Italy in the form of cheaper bilateral loans. After the 8-9 Dec EU summit, a new €200 billion Eurozone loan to the IMF was approved.
"The markets would be placated by greater IMF involvement for a few reasons: number 1, it would be easier to implement than a European-led solution, 2, it could limit moral hazard in the currency bloc since IMF loans come with strict terms that debtor states can’t break" Kathleen Brooks, Research Director at FOREX.com observes.
The messy EFSF leads to an ESM early start
Governments in Europe had a categorical failure to put into practice decisions underpinning the European Financial Stability Facility; the rescue fund was expected to be injected with a much stronger firepower than the current €440 billion, but as many other actions undertaken in the past, promises vanished before even being implemented.
The implementation of the long-standing mechanism to contain the crisis was meant to be leveraged by 4-5 times yet after becoming clear there is no borrowers to be found amid the lack of a solid plan to deal with the debt crisis, it has forced the new emerging countries like China, Russia, brazil or India to refuse sacrificing its huge reserves in a project that, unless overhaul from its roots, is doomed to collapse.
Mr. Regling, the head of the EFSF, announced late November some changes made on the European rescue fund after publicly acknowledging they had been defeated to leverage the fund as expected.
FX expert Ashraf Laidi from AshrafLaidi.com explained the new approach: “The EFSF will borrow short-term funds in December, but not to expect investors to commit substantial funds any time soon. He added that investment funds could help banks recapitalize. The EFSF shall insure 20-30% of sovereign bonds and will be able to leverage resources up to EUR 250bn, starting early 2012.”
Besides, and after the December EU summit, one of the agreements sealed by head of member states was to move up the start date of the €500 billion European Stability Mechanism, a fund initially meant to replace the EFSF by mid 2013, now agreed to come online one year earlier than it was planned.
Sense of failure on the Dec 8-9 EU summit
The reality of what came out of the EU summit is that we have the 17 Eurozone members agreeing on closer fiscal integration and tighter rules for budget discipline. In deeper detail, member states running a budget deficit above 3% of GDP would face automatic sanctions unless overturned by a majority of euro-zone nations.
The deal though, will have to be done outside the EU framework because the UK veto the pact. The rules governing Europe's single currency will have to be changed through an intergovernmental agreement, rather than a whole new treaty. That, as reported by Dow Jones "will be faster, though it wasn't the EU's first choice." As many as 26 member states will have to pass into law--or constitutions where appropriate--a rule that they will keep their budgets in balance, with a referendum being necessary in some cases.
As commented above, other significant agreements were plans to ramp up a much stronger firewall to curve the debt crisis contagion, including the €200 billion Eurozone loan to the IMF and moving up the start date of the €500 billion European Stability Mechanism, a fund that was meant to replace the EFSF by mid 2013, which has now been agreed to come online one year earlier than it was planned.
The markets will be on the watch-out for any possible credit rating downgrade by Standard & Poor's Corp., who warned ahead of the summit it could downgrade its sovereign rating on all the euro zone if it failed to bring the sovereign debt problem under control.
Paul Donovan form UBS seems to be skeptical about the decisions taken at the summit so far, which he considers a flash in the pan: “The IMF may get a loan of 200 billion euro. The ECB will administer the EFSF and ESM bailout mechanisms. Does this solve the crisis? Imposing a pro cyclical fiscal policy on a pro cyclical exchange rate and monetary policy without tackling competitiveness issues does not solve the larger crisis, no. It may buy time.”
Meanwhile, Scott Boyd, contributor at Oanda.com puts it more bluntly: “In the end, the Eurozone failed to provide a compelling argument to convince investors that a credible plan was in the works to prevent the crisis from spreading to the larger economies including Spain and Italy. One has to wonder how many more opportunities can be squandered before the Eurozone finds itself past the point of no return.”
Annika Breidthardt from Reuters gave her take, saying: “EU summit went a long way towards forging the closer economic ties needed to prevent future debt crises but markets are likely to judge it as too little and too late to solve the current one, and as on previous occasions the measures are unlikely to calm investors for long.”
An FT article just days after the agreement noted that the new Treaty agreed by 26 EU nations was already running into problems. According to the FT - several EU leaders are warning of difficulties in pushing a far reaching pact through their national parliaments. Most of the countries warning of problems are outside the eurozone like the UK, but Irish opposition leaders are calling for a referendum on the new pact and such a vote would likely fail.
Chances of a Euro break-up
While an imminent Euro split scenario appears to have been averted, the self-fulfilling prophecy of eventually seeing a wide Eurozone disintegration that makes the weakest go back to its old currencies or alternatively a division between surplus and deficit countries by introducing some kind of hard and soft Euro, will most likely remain an open question.
What is undeniable at this point is that we have moved from the concept of a EUR end to be a ridiculous, tabu subject to being widely accepted as a tangible, believable scenario. Over the past few months, contingency planning by European companies and large banks for a potential unraveling of the single currency have begun.
In a clear example of how many businesses are losing faith and that the 'can kicking down the road' practices by EZ politicians have a expiry date attached to it, it has been noted a worrisome sign of companies starting to cut investments, moving money to Germany, transferring headquarters to northern Europe from southern, and even going out of business.
Grupo Gowex (GOW), a Spanish provider of Wi-Fi wireless services, illustrates clearly the above note. As reported by ZeroHedge.com, the company is moving funds to Germany because it expects Spain to exit the euro. “I don’t trust Spain will remain in the euro zone,” said Jenaro Garcia, founder and chief executive officer of Madrid- based Grupo Gowex, which provides Wi-Fi access in 15 countries. “We moved our cash and deposits to Germany because Spain will come back to the peseta".
As rightly pointed by Kathleen Brooks, Research Director at FOREX.com: "Germany will either lead the Eurozone out of the crisis or it will manage its break-up, right now we are still in the balance as to which way the knife will fall."
Jean Pisani-Ferry, director of Bruegel, a respected Brussels think tank, was cited by Reuters recently noting that market participants and real businesses were increasingly pricing in such a break-up scenario. "It is still hard to think the unthinkable, let alone to work out the details of it, but any rational player has to consider the possibility of it. If disaster expectations build up and a growing number of players start positioning themselves to protect themselves from it, the consequences could become overwhelming," he said in a report.