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Euro Soars as EU, IMF Pledge Nearly €1 Trillion to Loan Package

Euro Soars as EU, IMF Pledge Nearly €1 Trillion to Loan Package

2010-05-10 05:07:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

Euro Soars as EU, IMF Pledge Nearly €1 Trillion to Loan Package
• Australian Business Confidence Falls for Second Month, Says NAB


Critical Levels

eu pics 0510

The Euro surged 1.5 percent against the US Dollar after the European Union announced a comprehensive 500 billion euro plan to contain the Greek budget crisis (see below). The British Pound also edged higher, adding 0.5 percent against the greenback as the EU announcement galvanized broad appetite for risky assets. We remain short EURUSD at 1.4881.

Asia Session Highlights

eu pics 0510 2

The economic calendar faded entirely into the background as traders focused on the much-anticipated EU stabilization plan to assure the debt crisis in Greece does not spill over throughout the region. After some delays for last-minute haggling, policymakers finally unveiled a 500 billion euro package, 440 billion of which would come in the form of loan guarantees while 60 billion would be carved out of the current EU budget. The International Monetary Fund was also tipped to be adding some 220 billion euros, making for a grand total of 720 billion euros ($928 billion). Further still, the European Central Bank pledged to conduct “interventions” in private and public debt markets to “ensure depth and liquidity in those market segments which are dysfunctional,” essentially committing to a quantitative easing scheme akin to those the US Fed, the BOE and the BOJ put in place during the 2008 credit crunch.

On balance, while the behemoth headline figure attached to the plan is surely designed to show investors once and for all that Europe is serious about getting its house in order, the setup has substantial shortcomings. First, Germany has said that the legal basis for the mechanism will be established in the “next days”, hinting that what was announced today is not as final as EU policymakers would like markets to suppose. Second, the fundamental structure of the package is suspect. Indeed, most of the funds come in the form of loan guarantees, meaning that, aside from bastions of fiscal discipline like Germany, the setup entrails some spendthrift countries vouching for the creditworthiness of other spendthrift countries. This is hardly confidence-inspiring, and while the Euro may see a temporary boost from the stabilization mechanism’s announcement, gains are unlikely to prove lasting considering the EU’s position is only barely less precarious with its introduction than before it.

Australian Business Confidence fell for a second consecutive month in April according to a report from the National Australia Bank (NAB), with declines in sales and forward orders leading the gauge lower. The outcome bolsters the likelihood that the central bank will pause its interest rate hike campaign in June, building on cues from last week’s RBA rate decision as well as the quarterly monetary policy statement.

Euro Session: What to Expect

eu pics 0510 3

The interest rate decision from the Bank of England headlines the economic calendar in European ours. This announcement seems to hold de-facto significance as it will be first since February to be based on an updated quarterly inflation forecast, but policymakers are unlikely to commit to any significant changes in monetary policy while the fiscal side of the equation remains in flux. Indeed, last week’s UK general election did not produce a majority for any of the competing parties, with the Conservatives and Labour now trying to cajole the Lib Dems into an alliance. This British Pound in a precarious position until something concrete is in place, allowing the central bank and currency traders alike to size up the ability of the incoming government to deal with the UK’s soaring budget deficit.


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