Euro Gains as Summit Produces Better than Expected Outcome
THE TAKEWAY: European summit exceeds expectations > Major developments help provide confidence > Euro rallies on good news.
The Euro gained after European leaders concluded their summit with three major developments: direct bank access to funds, plans to form a banking committee and bondholder seniority rights.
First, distressed banks are now able to access funds directly from the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) at lower interest rates than what their governments can borrow at. This is significant because previously governments would have to raise the cash at high interest rates then offer it to their banking system at the higher cost. Now, the money provided by theses organizations is offered directly to banks at materially lower rates. Second, discussion began to form an FDIC like banking oversight committee which should become clearer by the end of the year as to the role it will play in stabilizing financial markets. Third, bondholders will now be able to stand in front-of-the-line for payment in the event of a default on their investments.
The markets likely interpreted the positive news a sign to buy the risk-linked Euro against the safe-haven U.S. dollar.
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