A more technical look at the markets from InterTrader.
The long awaited comprehensive plan that Europe aspires to contain the two year old Eurozone crisis with came to light in the early hours of Thursday 27th October.
Spread betting investors initially greeted the signs of apparent success positively, amid rising optimism.
The European “bazooka” foresees a nominal discount of 50%, €100bn, on notional Greek debt held by private investors, who will be offered a sweetener of €30bn in return.
In addition, the EFSF will be scaled up about four to five times, with estimates of its firepower ranging from €1tn to €4tn. This will be achieved by either by offering insurance to the purchasers of Eurozone debt or through a SPI that aims to attract investment from China and Brazil.
In addition to the agreed measures, extra pressure was put on Italy to balance its budget. Banks are expected to seek private capital or, if necessary, get government support with the EFSF serving as the very last rescue vehicle.
In plain English, policy makers are buying time. Troubled European countries are expected to undergo further austerity and debt improvements, which will continue to put downward pressure on growth and ultimately worsen the fiscal picture. In fact, Greece has already proven that this is not really a viable solution.
Bondholders will take a haircut on the debt they own, but they will be capitalised in return. For the time being there is no agreement of any kind of fiscal union.
A larger EFSF instead aims to stem the bleeding and avert the worst case scenario, i.e. the European version of Lehman Brothers, as it ensures that European banks will not be allowed to fail.
Despite the lack of details and the lack of surprise, it looks like the deal manages to temporarily address the Eurozone liquidity issues. In reality this is just more of the same, but in greater size.
Considering the sum of money Italy and Spain require, and adding to that other potential future bailouts, Europe will be faced with the same problem again unless the fundamental flaws in the economic union are solved.
On the FX spread betting markets, the single currency seems likely to remain fundamentally driven until the agreement takes its final shape in the next few months.
Until Europe finds a way to resolve the imbalance caused by the euro, we had better not celebrate the end of the crisis, but for the time being we can breathe a sigh of relief.
Good luck and happy trading
Dafni Sedari, InterTrader
(Original article written 31 October 2011).
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