A decision on Greece might be postponed to year’s end, while France and Belgium are on the rescue of Dexia Group. Interest rates are on hold for now, but the E.C.B. could cut them in December. Bad news appears to be discounted in the current prices. The euro could briefly rebound from current levels
EURO: What is left to sell?
Cards are being dealt one more time, as Greece might receive additional funding in the coming weeks. Clearly, it would be a temporary solution. The debt is large and increasing. European banks have to commit infinite capital to keep the loosing game going. For now, however, pressure in the financial markets is fading away. With inflation receding from the highs, the E.C.B. is expected to cut rates by the end of the year.
On Thursday, during his last meeting as the president of the E.C.B (Mario Draghi will take over at the end of the month), Mr. Trichet admitted inflation is contracting, along with the decline of commodity prices. The E.C.B is now concerned about growth prospects, while the Gross Domestic Product (G.D.P) might stagnate in the last part of 2011. As a result, non-standard lending operations, such as the covered bond purchases, will be re-introduced. The euro might be able to benefit from this period of transition. How? Against the U.S. dollar, it could rebound to 1.35/136 and eventually to 1.39.
The worst is not over yet.
What is next? A “controlled” default of Greece is possible, once the European Financial Stability Facility (EFSF) is finalized this month. A new debt’s structure for Greece could be discussed in November/December. The triumvirate will hold the budget evaluation meeting and Greece’s future will be a priority. In effect, the worst might not be over yet. The long wave of the European sovereign debt crisis is hitting on Dexia Group, which holds a good portion of public sector debt. Since the bailout in 2008 by Belgium, France and Luxemburg, Dexia has been under a profound transformation that has not been completed yet.
The company has one of largest exposure to Greece and Italy debts. A Greek’s default could leave Dexia belly-up. It would also have a negative effect on governments and banks that have heavily invested into the company treasuries. France and Belgium are on the rescue. A huge injection of capital might be necessary to avoid the deadly domino effect. In addition, the company could be split apart. The effects of Greece’s default are beginning to surface. Who will be next? Financial markets have not yet completed their trajectories. A deeper sell-off of stocks and currencies is still possible, before different trends will start to set in. A decline of the euro below 1.3020 could in fact target 1.2950, 1.2870.
Angelo Airaghi, www.ProfitsOn.com
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