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FOREX: Austria May Be Next Victim of Euro Zone Debt Crisis

By , Currency Strategist
12 August 2011 06:46 GMT

Talking Points

  • Austria May Be the Next Victim of the Euro Zone Debt Crisis
  • SNB Threat of Euro / Franc Peg Likely a Boon for US Dollar
  • S&P 500 Futures Point to Another Reversal in Risk Appetite
  • US Retail Sales, Consumer Confidence Reports on Tap Ahead

With all the focus on France as the next possible destination for the Euro Zone debt crisis this week as rumors of a credit downgrade to the region’s number-two economy began to circulate around the news wires, little (if any) attention has been paid to increasing sovereign stress in Austria. Indeed, compared with other countries in the currency bloc, the country has seen the largest percentage increase in 5-year CDS rates – a gauge tracking the cost of insuring against a default that rises when the risk of such an event increases – over the past month.

The danger is in Austrian banks’ exposure to Eastern and Central Europe. As we discussed in July, the region have borrowed aggressively in Swiss Francsto take advantage of Switzerland’s low interest rates. Stratfor – a global intelligence advisory – points out that, “currently, 53 percent of outstanding mortgages in Poland and about 60 percent of those in Hungary are denominated in Francs”. The majority of those loans were made by the top six Austrian lenders: Bank Austria AG (owned by Italy’s UniCredit SpA), Erste Group Bank AG, Raiffeisen Bank International AG, Oesterreichische Volksbanken AG, BAWAG P.S.K. Bank, and Hypo Alpe-Adria International AG. Austrian borrowers themselves have also dabbled heavily in foreign-currency loans, which now make up almost a third of the country’s household debt, with most denominated in Francs.

With the Swiss currency perched just off a record high against its top counterparts, Central European borrowers (and many Austrian ones, for that matter) will find it hard to pay on their CHF-denominated obligations, causing massive losses for Austrian banks. If the government has to step in to bail out these banks – one of which (Alpe-Adria) was already nationalized in 2009 – the size of the package could be considerable. Multiple sources cite Austrian lenders’ Central and Eastern European exposure at about €230 billion, or 61.2 percent of 2010 GDP. As with Ireland, assuming a significant chunk of these liabilities could put the Austrian government – whose debt-to-GDP ratio is already equivalent to Italy’s (4.6%) – under tremendous funding stress, with the ultimate burden for the rescue likely falling on the already stretched-thin EFSF as well as the European Central Bank.

Needless to say, all this bodes ill for the Euro and ironically sends safety-seeking capital flows out of the single currency and into the Swiss Franc, compounding the problem further. Currency appreciation has been a major problem for Switzerland, so much so that the central bank threatened to peg the Franc to the Euro just yesterday. Given the Franc’s role as a back-door contagion mechanism for the Euro Zone’s debt crisis, the ECB might be on board to coordinate such an arrangement, making it a more plausible success. In this event, traders would be left with only one safe-haven currency refuge from Euro Zone turmoil that is free from the threat of overt intervention – the US Dollar – hinting at aggressive EURUSD downside ahead as the crisis continues to develop.

Elsewhere, S&P 500 stock index futures are pointing lower ahead of the opening bell in Europe, hinting the whipsaw volatility in risk sentiment trends noted over recent days is set to continue with another selloff coming on the heels of yesterday’s rebound. Needless to say, this bodes ill for stocks-correlated currencies while promising gains for the US Dollar, Franc and Japanese Yen. With little by way of market-moving data on tap in Europe, the spotlight will be focused on the US docket. Retail Sales and preliminary University of Michigan Consumer Confidence figures are expected to yield mixed results as the former rebounds to post the strongest increase in four months while the latter issues the third consecutive drop to the lowest level since March 2009.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

3:00

NZD

Non Resident Bond Holdings (JUL)

60.1%

-

61.4%

4:30

JPY

Industrial Production (MoM) (JUN F)

3.8%

-

3.9%

4:30

JPY

Industrial Production (YoY) (JUN F)

-1.7%

-

-1.6%

4:30

JPY

Capacity Utilization (MoM) (JUN)

5.2%

-

12.8%

Euro Session: What to Expect

GMT

CCY

EXP

PREV

IMPACT

5:30

EUR

French CPI (MoM) (JUL)

-0.3%

0.1%

Low

5:30

EUR

French CPI (YoY) (JUL)

2.2%

2.1%

Low

5:30

EUR

French CPI - EU Harmonised (MoM) (JUL)

-0.3%

0.1%

Low

5:30

EUR

French CPI - EU Harmonised (YoY) (JUL)

2.3%

2.3%

Low

5:30

EUR

French CPI Ex Tobacco Index (JUL)

122.19

122.49

Low

5:30

EUR

French GDP (YoY) (Q2 P)

2.0%

2.2%

Medium

5:30

EUR

French GDP (QoQ) (Q2 P)

0.3%

0.9%

Medium

6:45

EUR

French Non-Farm Payrolls (QoQ) (2Q P)

-

0.4%

Low

6:45

EUR

French Wages (QoQ) (2Q P)

-

1.0%

Low

8:00

EUR

Italian Trade Balance EU (€)

-

-600M

Low

8:00

EUR

Italian Trade Balance (Total) (€) (JUN)

-

-2407M

Low

9:00

EUR

Euro Zone Industrial Production (YoY) (JUN)

4.2%

4.4%

Medium

9:00

EUR

Euro Zone Industrial Production (MoM) (JUN)

0.0%

0.2%

Medium

9:00

EUR

Italian CPI (NIC incl. tobacco) (YoY) (JUL F)

2.7%

2.7%

Low

9:00

EUR

Italian CPI (NIC incl. tobacco) (MoM) (JUL F)

0.3%

0.3%

Low

9:00

EUR

Italian CPI - EU Harmonized (YoY) (JUL F)

2.1%

2.1%

Low

9:00

EUR

Italian CPI - EU Harmonized (MoM) (JUL F)

-1.7%

-1.7%

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.4023

1.4322

GBPUSD

1.6153

1.6282

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12 August 2011 06:46 GMT