Dealer Comment Weekly
The Dealer Comment weekly is published in the Sunday Business Post 'Money & Markets'
Author: Vincent Killeen, Senior Manager, Institutional Sales Team
Political uncertainty undermine EU’s efforts to address debt crisis
Published 13th May 2012
European markets came under selling pressure this week after the electorate in France and Greece voted to reject austerity measures that were imposed to save the euro and avoid bankruptcy. France elected a socialist government for the first time in over 17 years while Greece rejected both left and right political parties voting instead for parties opposed to the bailout deal.
The inconclusive results of the Greek election led to speculation that Greece will ultimately leave the monetary union after Alexis Tsipras, leader of the Syriza party, threatened to reject the terms of the EU-IMF bailout.
European officials voiced concerns about the outcome of the elections and Germany warned Greece that European partners could only go on aiding debt-ridden Athens if it sticks to an international bailout programme rejected by voters. German Finance Minister Schaeuble commented that ‘’Greece can rely on the solidarity of Europe, but if Greece does not help itself, there is nothing to be done’’.
Turmoil in Greece spread to Spain where the government took control over Bankia SA the country’s fourth largest bank in an attempt to support the banking sector. Spanish Prime Minister Rajoy said the banking sector was safe and more measures to strengthen the sector will be announced shortly.
Investors were unimpressed with events in Europe and there is growing concern that Spain will find it increasing difficult to get its public finances in order and that tightening fiscal policy may push the economy into recession forcing the government to apply for a bailout. Spanish 10 year debt traded back above 6% and the Euro finally broke below the strong support at $1.3000 trading to a low of $1.2915. We look for dollar strength to continue targeting a move to $1.2700.
In Britain the BoE left rates on hold at 0.5% and the asset purchase programme unchanged at £325bn. Once again sterling put in a strong performance supported by event risk in Europe. EUR/GBP traded to our target level at 0.8000 and while the Euro is oversold at current levels we look for continued sterling strength. A close below 0.8000 targets a move towards 0.7800.