IMF propose a Europe-wide system to regulate banks

IMF propose a Europe-wide system to regulate banks

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 30th of April.

There has been a growing chatter for a European “banking union” that separates the stricken banks from struggling peripheral states. The reason is simple; in countries like Ireland, the banks made too many bad loans and the states had to bail them out, damaging their creditworthiness. In Italy and Greece, the banks gorged on state issued bonds and as budget deficits widened and yields rose, banks assets tumbled. Spain witnessed the worst of the both the worlds. Spanish banks first made too many bad loans, and followed it up by purchasing government debts.

To remedy the situation, the IMF has proposed a Europe-wide system to regulate banks that will break this unholy nexus and shut erring banks down and pay off the depositors. The region’s banks will be viewed as European banks rather than Spanish, French or Italian banks and if they got into trouble, the states will remain untouched and vice versa.

It’s likely that politicians will oppose such a move since that will rob them of a tool to meddle in their banks. Also Spanish and Italian banks bought more govt. debt with cheap money, tying their fate with the government more closely. It helped the governments refinance debts and sail through a rough patch.

To begin with, it’s worthwhile to start with a Europe wide “resolution regime” that allows banks to collapse in a controlled fashion, avoiding a repetition of the Irish episode.  Also a deposit guarantee scheme may be initiated with the soon-to-be-rolled out European Stability Mechanism providing the members the backstop.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2282
GBP/US$ – 1.6294
GBP/CHF – 1.4764
GBP/CAN$ – 1.5982
GBP/AUS$ – 1.5586
GBP/ZAR – 12.595
GBP/JPY – 130.52
GBP/HKD – 12.6401
GBP/NZD – 1.9812
GBP/SEK –  10.936

EUR: The single currency struggled in early trade on Friday after the news of Spanish downgrade to BBB+ by credit ratings agency S&P hit the market. However, the euro didn’t lose much ground and the EUR/USD pair remained range-bound in a 200 basis points band. The GBP/EUR pair however surged to a 22-month high of 1.2293 after latest data showed that jobless rate deteriorated in the Iberian nation. Spain is expected to hog the limelight as Madrid publishes its Q1 GDP data which is likely to show that the country has slipped back into recession. The GBP/EUR pair is expected to keep its momentum going today though no GDP data is due from the UK today. The GBP/EUR pair opens at 1.2294 this morning.

USD: The lower-than-estimated US Q1 GDP number came as a big disappointment of Friday, pushing the pound to an eight-month high. Friday was the cable’s tenth day of gains, its longest winning streak since June 2002 as investors sold the greenback across the board over worries that the Fed will restart the quantitative easing program. However, the cable’s bull-run is unlikely to run for long considering that UK’s Q1 GDP growth has been negative and there’s a greater possibility of the BoE restarting the printing presses before the US Fed. The GBP/USD pair opens at 1.6281 this morning.

 

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