Good morning. There has been no new development in the last 24 hours from the eurozone. Talks of increasing the lending limit of the EFSF bailout fund to insure future sovereign debt defaults came to a naught as German Finance Minister Schaeuble emphasised that no such plan is currently on the table. Meanwhile, a London based think-tank, Open Europe, shot down the idea of increasing the firepower of EFSF to €2 trillion, warning that it would create even worse crisis. Instead, it argued, European banks should be ‘fundamentally recapitalised’ that would come with a far lower price tag of €372 billion. Ahead of the G20 meeting on Sunday, it advised a radical restructuring of Greek, Irish and Portuguese debt.
“The recently mooted plan to use the EFSF to insure eurozone sovereign debt looks to be misguided. Using a fund backed by eurozone countries to insure against a default of some of the very same economies creates a circular problem. It was financial instruments with huge leverage and unfunded liabilities that largely created this financial mess in the first place. Replicating such a structure at the heart of the eurozone could potentially create an even worse crisis down the road,” said Raoul Ruparel, director of research at Open Europe. It suggests that the second bailout to Greece be scrapped and the country should be allowed to default on 60 per cent of its debt. Similarly, Portugal should offer a 25 per cent write down on its debts to private investors.
While Open Europe’s suggestion has its merits, mainly it will save lot of tax-payer’s money on a seemingly hopeless Greek debt situation, apart from restoring some faith on the European banking system – the ECB in particular, there are some roadblocks. Among the private investors, apart from the banks on both sides of Atlantic, many investment and pension funds continue to hold Greek debts. A 60 per cent default may create havoc for the retirement industry, ripping people of their old-age savings and forcing them to stay on work far longer.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1456
GBP/US$ – 1.5708
GBP/CHF – 1.4238
GBP/CAN$ – 1.6061
GBP/AUS$ – 1.5435
GBP/ZAR – 12.6838
GBP/JPY – 120.65
GBP/HKD – 12.2328
GBP/NZD – 1.9821
GBP/SEK – 10.4530
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EURO: The EUR/USD pair fell below the 1.3700 level yesterday as risk sentiment turned negative. Reports of IMF seeking more information over Greece’s next aid tranche from the ECB pushed the single currency down further to 1.3675. The GBP/EUR pair also weakened yesterday to touch 1.1400. However, it recovered today morning to open at 1.1450.
USD: Bank of England’s MPC minutes released yesterday showed an unanimous decision by the members for increasing the money supply by £75 billion. In fact the committee had discussed buying an additional £100 billion in assets. The GBP/USD pair touched a high of 1.5840, but failed to keep the momentum and opened at 1.5725 this morning. UK retail sales data is expected this morning, along with the German government’s revised GDP forecasts data.