Seventeen finance ministers agree to boost the rescue fund to at least €700 billion

Seventeen finance ministers agree to boost the rescue fund to at least €700 billion

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 2nd of April.

The eurozone took another step towards resolving its debt crisis after 17 finance ministers from the so-called Eurogroup agreed to boost the region’s rescue fund to at least €700 billion. Maria Fekter, the Austrian Finance Minister announced that the amount represents €200 billion to Greece, Ireland and Portugal, €49 billion from the original EFSF, €53 billion in bilateral loans and another €500 billion in the yet to be commissioned European Stability Mechanism (ESM). The final amount however, fell well short of the €1,000 billion mark expected by many.

The new development essentially buys some time for the European Central Bank and the region’s leaders. However, they must not signs of fatigue and remain ahead of the curve in resolving the crisis. The ECB’s previous €1 trillion liquidity injection in the region’s banks and the latest development have certainly cooled the situation temporarily, but the problem is as temperatures drop, so does the government’s determination to push through unpopular reforms. Early signs of this dangerous trend were witnessed recently when Italian Prime Minister Mario Monti claimed that the worst is behind us, which is rather premature at this stage.

Tell tale signs of fatigue have started to emerge with Monti’s popularity nose diving to 44 percent from 62 percent in end Feb. He could have pushed austerity measures when the electorate was afraid that Italy would be sucked into the crisis, but since he didn’t, his latest efforts may just fritter away despite he coming with a reasonably good package this time around. Though Monti can be theoretically eased out of his chair, other political parties would resist the temptation since they are more unpopular than him.

Spain is also playing out the same story. In fact the similar problems are popping up at unexpected places. Take the case of the Netherlands. Generally a high priest of fiscal-rectitude, the Dutch coalition government may collapse under the stress of deficit cuts.

Indeed deficit cuts can crush growths and shrink the tax-base. But the governments can’t afford go easy short-term measures. Long-term measures like freeing up the labour markets and introducing more competition in the service sector could boost the GDP of largesr economies like France, Italy and Spain by about 15 percent, notes the Organisation for Economic Cooperation and Development. Even near non-existent German service industry can add 13 percent to GDP through these reforms, the OECD report observes.


GBP/EURO – 1.1998
GBP/US$ – 1.6020
GBP/CHF – 1.4456
GBP/CAN$ – 1.5967
GBP/AUS$ – 1.5389
GBP/ZAR – 12.24
GBP/JPY – 132.98
GBP/HKD – 12.4424
GBP/NZD – 1.9527
GBP/SEK – 10.5921

EURO: The single currency remained firm against most of its global peers on Friday, despite the European rescue fund coming in smaller than anticipated. However, on the positive side, Spain’s parliament approved this year’s budget which contains some very aggressive spending-cut targets. The GBP/EUR pair remained range-bound and closed the week at 1.2010. A slew of economic numbers are expected this week, starting with the eurozone PMI numbers today. The GBP/EUR pair opens at 1.2000 this morning.
USD: The cable remained strong against the greenback on Friday despite month end demand and overall strong data from the US supporting the dollar. The GBP/USD pair touched a session high of 1.6041 before settling at 1.6000 in the absence of any significant releases. There are several key releases due this week from the other side of the pond and the sterling’s movement would largely be dictated by US data this week. The GBP/USD opens this morning at 1.6056.


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