Good morning. The European leaders have managed to seal a three-tier deal on Thursday which they feel will help stabilise the European Union. The private banks and insurers have ‘voluntarily’ agreed to accept a 50 percent loss on Greek bond holdings that the EU believes will go a long way in saving the country’s economy.
To begin with, the leaders have agreed to a bigger EFSF fund – the fund’s lending limit can be nearly quadrupled to about €1 trillion. Though the fund’s present size is €440 billion, its lending capacity is much lower due to various restrictions. New proposals suggest that the European Financial Stability Facility (EFSF) should have between €250 billion and €275billion available after providing aid to Greece, Portugal and Ireland. The final size of the EFSF could be finalised after talking to sovereign funds of the middle-east and China and gauging their risk-appetite.
A state-sponsored insurance scheme has been proposed to attract investors into buying bonds of peripheral countries. Though the details are yet to be worked out, suggestions of first 20 per cent of any loss are circling.
A special purpose investment vehicle has been proposed to attract foreign investors for buying eurozone debts.
After the private investors were offered 50 per cent ‘‘hair-cut’’ on Greek debts – the move is expected to help bring down the country’s debt-GDP ratio to 120 per cent from the current 160 per cent by 2020, EU leaders offered €30 billion worth “credit enhancements” to sweeten the deal. The details on the deal are however, awaited.
Third and lastly, a stronger fiscal and economic oversight committee has been proposed. This is an important since many economists have accused the EU regulators of omissions, if not commissions, for allowing Greece to cook their books and build up such crippling debts in the first place. An interim report on the possible steps to strengthen the union will be presented in December 2011.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1418
GBP/US$ – 1.5996
GBP/CHF – 1.4015
GBP/CAN$ – 1.5980
GBP/AUS$ – 1.5176
GBP/ZAR – 12.5250
GBP/JPY – 121.42
GBP/HKD – 12.4462
GBP/NZD – 1.9792
GBP/SEK – 10.3242
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EURO: The EUR/USD pair strengthened in the last 24 hours over better risk sentiments. Further austerity measures are expected from Italy and Spain to contain the damage in the euro-zone. The EUR/USD pair broke the 1.4000 level yesterday and opens at the same level today morning. The GBP/EURO pair opens at the 1.1430 level today morning.
USD: The improved risk sentiment weakened the greenback against the common currency. The GBP/USD pair had slipped to 1.5890 yesterday, but touched the 1.6040 level on 50 per cent Greek ‘haircut’ news. The cable remains well supported this morning despite MPC member warning of a possible second recession in the UK.
Elsewhere, Japan announced its decision to increase money supply in the system and the new round of QE would be for ¥5 trillion. Both the AUD and the NZD gained against the greenback yesterday as risk appetites improved.
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Have a great day!