Eurozone Crisis: Governments should get their act together

Eurozone Crisis: Governments should get their act together

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the14th of June.

UK banks look underprepared in the event of a credit event in the single-currency union. The Bank of England doesn’t have a short-term liquidity crunch fighting strategy, similar to the European Central Bank’s LTRO scheme, despite setting up of a number of arrangements after the 2008 financial crisis. If the weekend proves decisive for Greece and a crisis befalls global markets, UK lenders have nowhere to turn to except the government.

The British central bank has three conventional tools to ease liquidity shortfalls. The Indexed Long-Term Repo (ILTR) allows banks to borrow up to six months against liquid collaterals. The Extended Collateral Term Repo facility (ECTR) allows banks to borrow against sticky collaterals, albeit for a higher fee, while troubled banks can borrow up to one year using the Discount Window Facility (DWF) to swap illiquid collateral for gilts.

The ECTR is the closest rival to ECB’s LTRO though there are two significant differences. First, the unlike LTRO, ECTR is limited in size. Second, LTRO will run for three years while ECTR is valid for 30 days. Though a Greece exit may put British banks at a disadvantage, the BoE need not rush to mimic the LTRO. For one, LTRO encourages carry trade by banks, making lending to businesses and individuals unattractive.

However, UK has a clear advantage that most of the EU lenders don’t enjoy; government support. Most of the £250 billion of the multi-year Credit Guarantee Scheme provided by the UK Treasury on bank debt has been recovered. The BoE’s integrity would be preserved while maintaining UK’s historical low bond yields if a fresh round of CGS is launched next week after Greece election results are declared.


GBP/EURO – 1.2314
GBP/US$ – 1.5488
GBP/CHF – 1.4801
GBP/CAN$ – 1.5914
GBP/AUS$ – 1.5562
GBP/ZAR – 12.9731
GBP/JPY – 122.90
GBP/HKD – 12.0080
GBP/NZD – 1.9936
GBP/SEK – 10.8854

EUR: The single currency gained traction in early trading against the greenback yesterday after US retail sales number came in softer than expected. The EUR/USD pair weakened further on short covering to touch a high 1.2610 ahead of Greece’s Sunday elections. However, the day’s high could not be sustained after news of Moody’s downgrading Spain by three notches hit the wires, leaving the Iberian nation one notch above speculative grade. The GBP/EUR pair finished at 1.2340 despite starting the day at 1.2400 as markets squared positions ahead of weekend. The European data calendar is light today and markets will keep an eye over Italy’s bond auctions due today morning. The GBP/EUR pair opens at 1.2315 this morning.

USD: The GBP/USD pair failed to breach the 1.5600 level yesterday and the cable settled lower against most of its peers yesterday despite the lack of any economic data in the UK. The lack of any positive development across the EU and concerns over the response of the Bank of England if the situation deteriorated further could have been the reason for the Pound’s weakness. Investors were reluctant to take undue risk ahead of Greece’s Sunday elections. The greenback however, came under pressure after retail sales reading dropped for the second month on the trot, rising hopes for another round of monetary stimulus by the Federal Reserve. The weekly initial jobless claims and CPI numbers are due today from the other side of the pond and the GBP/USD is expected to take cue from the EUR/USD pair. GBP/USD opens at 1.5482 this morning.


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