IMF raises over £250 billion- but is it enough?

The International Monetary Fund’s (IMF) has raised an additional £268 billion ($430 billion) for the pot meaning another set of support for the eurozone when it will be required.IMF raises over £250 billion- but is it enough?However, several other uncertainties persist to bother markets signifying that any rally could be short lived.

There is plenty of data and events this week including central bank decisions in the US, Japan and New Zealand.

In addition, US corporate earnings will stay under the spot light while bond auctions in the eurozone will also provide market drive.

It is doubtful that the Fed meeting tomorrow and Wednesday will incite any change in the currently low FX volatility atmosphere given that strategy settings will stay unchanged, with the bulk of FOMC members likely to look for the first alterations at the earliest in 2014.

The Fed as a result is unlikely to stir the Greenback out of its daze and if anything a fall in durable goods orders, little change in new home sales and a pull back in consumer confidence will play in support to Dollar bears over the coming week.

Even a relatively firm reading for Q1 GDP will be seen as backward looking given the slowing expected in Q2.

Over to Europe and the single European currency will have to compete with political proceedings as it absorbs the outcome of the initial round of the French presidential elections.

The reality is that the political course will carry on to a second round on 6 May which will act as a limit on the euro.

A variety of ‘flash’ purchasing managers indices (PMI) readings and economic opinion gauges will present some primary direction for the Euro but mostly stable to softer readings suggest little stimulation.

As a result euro/ US Dollar will largely remain within its recent range although news from Spain and Italy and their debt markets will have the potential to bring into play larger moves against the euro.

IMF waiting for European lead

This week is likely to be a much calmer and quieter affair in comparison to last week which brought the ongoing Greek debt crisis to a close for the short term. IMF waiting for European leadWhether this will last remains to be seen as the struggling nation will have to renew future debt deadlines in addition to steering through an election in April.

Expect the euro to trade in limbo as traders decide on their view over how successful this latest deal will be.

Comments have been coming thick and fast from finance minsters around the world with statements ranging from ultra positive to cautious.

The G20 met in Mexico over the weekend with the topic of Euro contagion at the top of the agenda.

The eurozone countries pledged to reassess the strength of their bailout fund in March, which would clear the way for other G20 countries to contribute via the International Monetary Fund.

The G20 said “This will provide an essential input in our ongoing consideration to mobilise resources to the IMF”.

Data this week comes mainly from the States with US durable goods orders on Tuesday, GDP on Wednesday and jobless claims on Thursday.

The US government will be expecting positive figures across the board as they continue to spend their way out of recession to attract growth.

Euro outlook remains weak to wise money

The probability of further ECB interest rate rises in the near term increased yesterday as the eurozone recorded another slight increase in the core cost of living index.
Euro outlook remains weak to wise moneyGiven the hawkish tones (although they were slightly less so at the last meeting) of the ECB, one would expect the euro to respond positively to the prospect of higher rates, but sentiment remains weak in light of a continuing story regarding the head of the IMF, Dominique Strauss-Kahn, and its potential impact on the ongoing sovereign debt issues.

Mr Strauss-Kahn was refused bail and will remain in custody until his next hearing on the 20th May.

In his absence EU financial ministers did manage to approve the £65 Billion bail out of Portugal, the IMF providing around one third of the funds (the other two-thirds are from the 2 bail-out vehicles set up by the EU).

Over in the US President Obama again called for Congress to approve increasing the debt ceiling to avoid what he described as a potential “devastating economic and financial crisis”.

Republicans are aiming for guarantees on deficit reduction before they agree to a hike in the debt ceiling and the inertia is beginning to worry the markets, given the estimated day that the government runs out of money is the 2nd of August.

The Federal Reserve minutes from their last meeting are due today at 6pm, as ever the markets will be looking for comments on the economic recovery (especially on housing and the labour market) and anything regarding the end of QE2 and the Fed’s strategy once the easing has ended.

Politics rules the money markets at the moment

Currency conflicts at the G20 gathering in Nanjing continue to undermine markets with the obvious divisions between member nations on the way forward causing the very moves that participants are looking to correct. Politics rules the money markets at the momentThe US, through Tim Geithner, maintain their attack on the Chinese policy of not allowing its currency to float freely, arguing that to adopt such a move would enable the Yuan to take on a much more high profile global role.

He adds that becoming a constituent of the IMF’s currency basket would be the clear evolution.

The European delegates remain wary of further Dollar strength with the French President, M. Sarkozy summing up the concern when he argued against the Euro, or any other currency, usurping the Greenback role as the global reserve medium.

He added that recent Euro strength versus the Dollar was unjustified.

Overnight, we saw the stronger Dollar from the last few days give up some of its gains on comments from Federal Reserve member Bullard clarifying his reported remarks from the day before.

He said that there is no consensus on the FOMC about ending QE2 early, and that this is unlikely to take place.

He also said that the Federal Reserve would be able to tighten policy by not necessarily pushing up official rates, but by starting to sell back assets adding that this cycle of tightening would be far more difficult to manage.

The weaker Dollar / stronger Euro scenario was further enhanced by yet more comments from ECB Board members, Bini-Smaghi and Stark who both cemented in the probability of a rise in the official Euro interest rate at next week’s regular meeting.

The former talked of rates being returned to normal levels in a “gradual way” whilst Stark pointed out the fact that policy rates at present levels were exceptionally low.

There are more risks to being inside the eurozone than being outside

Wise Money repeats the words of the Polish central bank governor, Marek Belka, earlier this month, echoing the private thoughts of leaders across Central and Eastern Europe.
There are more risks to being inside the eurozone than being outsideMany of them are thinking long and hard about the promise to join the euro that they made (or will make) when they signed up for the European Union (EU).

They will certainly be watching the fates of Portugal, Ireland, Greece and Spain (PIGS) with great concern.

The PIGS are now caught in a euro trap. The boom years swelled their labour markets and their public finances.

Now the bust leaves them uncompetitive and with a major debt hangover.

But the usual cheap cure to these ailments, currency devaluation, is not an option inside the euro.

So does this mean the EU’s newcomers and wannabes have decided to kick their own euro-membership plans into the long grass?

The Czech Republic and Poland, countries with notable Eurosceptic politicians, do not especially want to join the eurozone at all.

Both did very well outside the euro during the 2009 downturn, thanks in part to the sharp drop in their currencies, which helped them keep a competitive edge, he explains.

Poland did not even experience a recession, an almost unique achievement in Europe, though government spending had a lot to do with this.

But for some East European countries it may already be too late to escape the same euro-trap now afflicting their Mediterranean peers.

Although technically outside the single currency, many have pegged their currencies to the euro.

Estonia, which plans to join the euro in January, saw its economy shrink 17% last year after it slashed government spending and refused to devalue the kroon. Its Baltic neighbour Latvia fell a whopping 25%.

For others, notably Hungary, devaluation was not the easy option that it would have liked.

For years, ordinary Hungarians had taken out their mortgages in foreign currencies, such as the euro, Swiss franc or even the yen.

The Hungarian forint was going to join the euro eventually anyway, so why pay the much higher interest rates demanded in their own currency?

The reason, as so many were to discover, is that their foreign currency mortgage payments became unaffordable when the forint lost a quarter of its value.

That gave the authorities in Budapest a nasty dilemma: keep the forint strong and suffer a deeper collapse in exports, or let the forint fall and watch its banking system sink under a mountain of unrepayable mortgage debts.

In the end, they called in the International Monetary Fund (IMF).

European Central Bank worries about the rationality of Irish bail out

The European Central Bank (ECB) has expressed worries that the process of the Irish Republic’s £72 billion bail out package could affect its ability to provide further support to eurozone members.
European Central Bank worries about the rationality of Irish bail outThe bank said that flaws in the Irish bail-out legislation could compromise its ability to provide collateral for future funding.

It said it had concerns over the quality of collateral to cover loans.

On Friday, credit rating agency Moody’s cut sharply the Republic’s debt rating.

“The ECB has serious concerns that the draft law is insufficiently legally certain on a number of critical issues for the euro system,” the bank said in a recent paper.

It questioned the powers granted to the Irish Finance Minister Brian Lenihan by the draft law “interfere significantly” with the rights of shareholders and creditors of financial institutions.

“Furthermore, the ECB suggests further clarification that the rights of the central bank and the ECB, as creditors of any relevant institution, will not be affected,” the bank said.

It added that the paper, was a response to a request from Mr Lenihan for its opinion on draft legislation granting him extra powers to ensure the Republic’s financial stability.

It said it “welcomed” the request and understood “the need for an accelerated legislative procedure”, but said it would have “appreciated being consulted at an earlier stage”.

Last week, the International Monetary Fund (IMF) approved a three-year loan of 22.5bn euros for the Republic.

The funds form the first part of the IMF’s contribution to the EU and IMF rescue package.

Ireland’s bail out- will it work?

So we now know the gory details. First, the main points: the Irish bailout of €85 billion will be made up of external support from the IMF and EFSF of €67.5 billion and domestic funds of €17.5 billion.Ireland's bail out- will it work and who's next?The Irish contribution comes from the now decimated National Pension Reserve Fund with the UK making a bilateral loan of €3.8 billion as well as contributing to the IMF funds (and you thought the money saved in recent round of UK spending cuts was used for paying down our own debt…).

The effective interest rate that the Irish will pay on the loan is reported at 5.8% according to the official document, but private calculations have put the figure closer to 7.25% and this will lead to an astonishing 20 per cent of Irish tax revenues servicing the debt by 2014 according to calculations.

Which Wise Money calculates will be completely unsustainable.

The main controversy is the news that senior bond holders in the Irish banks will received no haircut on their holdings – no doubt due to contagion fears as investors dump bank bonds in the event of any short back and sides – and the banks are estimated to need an extra €8bn to get core Tier One capital to at least 12 per cent.

And now come up for breath.

More than three quarters of Eurozone government debt is held by Eurozone members, mostly financial institutions so you can see why this package wants to protect senior debt holders, but politically there is huge pressure to make sure that tax payers do not shoulder the whole burden and write downs on bond holdings in the future cannot be ruled out.

Inevitably the Euro continues to fall against the US Dollar- which continues to perform well in the face of heightened uncertainty.

Sterling has also opened the week on the back foot as UK institutions are reckoned to be the most financially exposed to the Irish, particularly RBS through Ulster Bank.

UK House prices have continued to fall for the fifth month in row, but mortgage approvals came in slightly ahead of forecast.

There will need to be a much larger turn around in approvals for it to have any significant impact on house prices in a falling market. This week is a light one for Sterling data which the only figures of note UK PMI on Wednesday and further house price figures on Friday.

The Dollar trades at a two month high against the Euro and is looking at its first monthly gain versus the Yen since April.

In a week which will probably prove to be highly embarrassing for the US after 250,000 classified diplomatic cables are released by media around the world, we have ISM manufacturing, consumer confidence and non farm payrolls to look forward to.

But not as much as those cables. According to reports, the cables will reveal disparaging remarks about Gordon Brown and David Cameron, my bet is that the UK public will probably agree with whatever is said.

Portugal and Spain targetted as bond spreads hit record

The borrowing costs for Portugal and Spain have surged to danger levels on fears that Europe’s leaders have lost political control of the Irish crisis and have yet to agree on a coherent plan to tackle the eurozone’s deeper debt woes.
Portugal and Spain targetted as bond spreads hit recordYields on 10-year Portuguese bonds jumped to 6.9pc, replicating the pattern seen in Greece and Ireland just before they capitulated and turned to the EU and the International Monetary Fund.

Spreads on 10-year Spanish bonds rose to a post-EMU record of 233 basis points over Bunds, pushing the yield to 4.87pc.

Spain’s central bank governor, Miguel Angel Fenrandez Ordonez, said the contagion had spread rapidly to the eurozone periphery and “made itself felt” in the Spanish debt markets. He called on Madrid to accelerate fiscal reforms to persuade the markets the country really means to put its house in order.

German Chancellor Angela Merkel admitted on Tuesday that the eurozone was “facing an exceptionally serious situation”.

She brushed aside criticism that German insistence on bondholder “haircuts” or debt write offs from 2013 was fuelling the crisis.

However Dutch finance minister Jan Kees de Jager sent a further chill through markets, saying “holders of subordinated bonds in Irish banks will have to bleed” under the Irish rescue.

The comment touched a raw nerve, heightening fears that investors may be treated harshly under the bail-out terms for any country needing a rescue.

Bank of Ireland shares crashed 23pc and Allied Irish Bank’s fell 19pc on fears that shareholders will be wiped out. Ominously, there was a sharp sell-off of Spain’s two top banks, with Santander down 4.7pc and BBVA down 3.9pc.

Meanwhile chief ostrich- EU president Herman Van Rompuy denied that Lisbon needs a lifeline, insisting that Portugal’s banks are well capitalised and do not face property losses. “Portugal does not need any help – it is in a very different situation to Ireland,” he said.

However, Portuguese banks have been shut out of the capital markets. The country’s total debt level is one of the world’s highest, at 325pc of GDP, and it has a current account deficit of 10pc – which requires a flow of external funding.

Kaiser Merkel sinks Irish independence

Ireland blamed Germany for stoking fears that holders of government bonds could be forced to suffer losses as the cost of Ireland’s borrowing hit fresh highs.
Kaiser Merkel sinks Irish independenceMarkets worry whether Ireland will be able to repay its debts, given its costly bank bail-out, weak growth and a huge budget deficit of 14.4pc of GDP, the eurozone’s highest.

Brian Lenihan, Ireland’s finance minister said the spike in borrowing costs was partly driven by “unintended” German comments proposing bondholders be forced to take losses if sovereign debt is restructured.

The market nerves pushed the spread between Irish 10-year bond yields and German yields to well over 6 percentage points, a new record. The cost of insuring Irish debt against default also hit a fresh high.

Germany has indicated the proposals would not apply to existing debt, but fears over potential losses are high after France said on Wednesday that investors must share in the cost of safeguarding debt.

German Chancellor Angela Merkel argued last week that taxpayers could not keep being told they “have to be on the hook for certain risks, rather than those who make a lot of money taking those risks.”

Although the Irish government is fully funded into the middle of next year, analysts warned politicians’ talk of losses risked creating a self-fulfilling prophecy that Ireland and other debt-laden nations will have to restructure.

Irish yields are now well above the levels Greece faced just before it saved from defaulting through a £100bn loan in the spring, according to Capital Economics.

There were warnings solvency fears were spreading as Portugal and Spain also saw the cost of insuring their debt against default soar, which kept the euro under continued pressure.

US Dollar on the back foot again over Irish woes

Earlier this week we saw a squeeze higher on the US Dollar catalysed by good US retail sales numbers  but more so through the concern over Ireland tripping into dollar strength. US Dolllar on the back foot again over Irish woesToday the market is appeased as a bailout is inevitable- ECB and IMF officials are looking into the formalities of what will be needed for the Irish economy.

The euro has pushed higher on this realisation trading back up to 1.37 against the USD supported by middle-eastern buying.

The key question is will confidence remain in the euro arena- according to Citigroup Inc and Nomura Plc the answer will be a no.

They say that relief will be short-lived as attention turns to who is next and all fingers are pointing to Portugal.

The Portuguese Finance Minister said that while “there is a risk of contagion”, that does not mean that the country will seek financial aid- so the merry go round could start again.

On top of the bailout plans Ireland will also announce a 4 year fiscal plan to help steady the ship.

Although Dublin insists that there is no threat to Ireland’s 12.5% corporation tax, the mood over the loss of economic sovereignty was summed up by Mary Lou McDonald from Sinn Fein who stated “Officials from the EU and IMF and any other vultures circling around this country should be told to get lost”.

Tough times ahead for Ireland and there is still a possibility that sovereign issues will continue to weigh on the euro for some time to come.

Focusing on the UK, retail sales rose for the first time in three months, by 0.5% providing a much needed boost as we approach the Christmas period.

The Pound has also been lifted on the news of a bailout for Ireland- the UK is exposed to Irish debt and this led to sterling weakness earlier in the week which has now been somewhat lifted.