Blackmail by big banks

Blackmail by big banks

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 22th of August.

As the threat over a global economic meltdown loomed over horizon, the G-20’s decision to save systematically important banks may have been appropriate in Nov 2008. But that decision, coupled with lax regulatory control and bad policies by governments and central banks, has given highly leveraged banks a tool to blackmail their rescuers, and created a situation where they have been exempted from liabilities.

The big banks manage to survive despite such not-to-implicit threat based on the premise that the financial sector, and the economic payment system, would collapse if a systematically important bank is allowed to become insolvent. However, time has come to call the bank’s bluff; bank insolvency should be separated from the payment system.

Also the G20’s decision to prop up systematically banks must be revisited and governments must act to bank threats accordingly. An economy that deviates from the basic profit and loss principle where there are no bankruptcies and no rule of law is no market economy at all. Laws that are valid for other sectors should hold good for banks as well.

To safeguard the payment system the governments must guarantee customer deposits and reform the insolvency laws. No government guarantees are required for interbank transfers that do not affect customer deposits. Regulators should oversee state-guaranteed payments are honoured while central banks continue to refinance these payments for seamless operation.

These steps will ensure the safety of payment systems as bank transactions will not collapse in case of insolvency. There will never be a run on savings deposits due to official guarantees. After all, a banknote is money because it’s backed by government guarantees and hence no different from savings deposits, meaning holding cash has little advantage over deposits. Thus there will be no run on banks.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2658
GBP/US$ – 1.5776
GBP/CHF – 1.5214
GBP/CAN$ – 1.5633
GBP/AUS$ – 1.5107
GBP/ZAR – 13.0458
GBP/JPY – 125.19
GBP/HKD – 12.2390
GBP/NZD – 1.9518
GBP/SEK – 10.5188

EUR: The single currency emerged as the best performing G10 currency yesterday with speculations over the ECB intervention in the bonds markets and favourable concessions for Greece on austerity-driven deficit reduction target extension getting stronger. The euro hit 7-week high against the greenback and a two-week high against the pound while Spanish 10-year borrowing costs continued to slide and Italian and Spanish Credit Default Swaps dropped to their lowest levels since April. The single-currency is expected to trade in a narrow range in the absence of tier 1 economic data today with the GBP/EUR pair expected to take cue from the EUR/USD movement. GBP/EUR opens at 1.2671 this morning.

USD: The GBP/USD rose to a three-month of 1.5804 yesterday despite disappointing CBI industrial trends survey and a soft UK public sector finance data. The rally in the EUR/USD counter triggered the cable’s upward journey as investors grew optimistic over an impending ECB intervention to cap Spanish and Italian borrowing costs. Minutes of the FOMC’s last meeting will be in focus today in the absence of market moving economic data globally as investors will try to figure out the possibility of another round of monetary stimulus by the central bank in its September meeting. As sentiment over the euro improves, the pound should gain further traction against the dollar. The GBP/USD opens at 1.5780 this morning.

Have a great day!

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