(EU) European Central Bank (ECB) is considering establishing interest rate ceiling levels for troubled states as part of its future bond purchase program; To make a decision on target rates at its next meeting (Positive)
(EU) ECB responds to German press report on possible intervention: (Negative)
(DE) German Finance Ministry monthly report: Economy to grow at a slower pace due to weaker demand in euro area (Negative)
(ES) Spain Econ Min de Guindos: Would like to see the ECB commit to massive, open-ended sovereign-debt purchases before it asks for help (Positive)
(ES) The Spanish government may consider additional austerity to meet its 2012 deficit target if the tax revenue outcome turns out to be inadequate. The 2012 deficit-to-GDP target is at 5.3% (and is 3.0% for 2013) (Neutral).
(EU) ECB’s Asmussen: Greek exit would be manageable but not preferred; Up to Greece to stay in the euro zone (Neutral).
(GR) Greece budget shortfall could be bigger than previously believed, reaching as high as €14B (vs €11B prior estimate) (Negative).
How to interpret these headlines?
European Crisis Update: First of all, any ECB action to support the EU should be considered as positive, especially when it addresses the cost of funding for troubling members such as Spain and Italy. The Interest Rate Ceiling is a good way to cut yields, and when you combine that with outright bond purchases, Spanish government may have a chance to avoid further deterioration of its economy… The situation in Spain is no longer if it needs a bailout, but more of a question of how to negotiate the best terms possible by holding out and drag the rest of Europe with it… This is clearly a game of chicken as the Spanish Fin Minister is now asking for ECB to commit an open-ended debt purchases, responding to ECB’s pledge that it “may” act if a member state requests assistance, as both parties want to reserve their flexibilities… We’ll have to see how it plays out in the near term.
As far as Greece is concerned, I believe they will have to exit the EU, and the market has already priced in that potential scenario… Although we don’t know for sure what the extend of the fallout from a “Grexit” will be like, it is safe to assume that most financial institutions with heavy exposures have adjusted their positions since the last Greek election, leaving perhaps only the ECB and other central banks in the hooks for now, but they have deep pockets and the power to print more money, so the effects should be “manageable” as ECB Asmussen puts it…
As far as the general health of the EU, that’s going to take a while longer. As much as it is hard to imagine, with the European debt crisis unfolding in the last few months and Euro’s fall from grace against the USD, Euro has become more competitive to say the least, and what goes down must come up, that’s the rule in Forex.
All in all I’m more inclined to buy EURUSD on dips, considering the potential for improvements, ECB intervention, and Fed QE announcements, it is a no-brainer in my opinion…
European Crisis Update: ECB Intervention And Greek Exit
August 20, 2012 by 14 Comments