The G20 have given the Eurozone a week to get their house in order. The richest 20 nations in the world argued that mainly France and Germany have to “ensure that banks are adequately capitalised and have sufficient access to funding to deal with current risks” while calling on the IMF to develop specific proposals on how short term liquidity could be provided to countries facing shocks. French Finance Minister Francois Baroin told a press conference following the meeting that “The results of October 23 will be decisive,” while his counterpart Wolfgang Schaeuble vowed that Europe would “bring a comprehensive package of measures” to the meeting one week from Sunday.

Schaeuble has also been pushing for higher haircuts, or losses, on Greek debt. The rate is already at 21% and the German Finance Minister is pushing for something nearer the 50-60% mark. This has come in for some criticism from the French however as it is French banks that hold a vast swathe of Greek debt and, should the new stress tests in the EU require a tier 1 capital ratio of 9% then many French lenders, as well as banks in other countries, will need additional funding.

It does however seem like the assembled political elite have worked out the impact of further inaction; nobody wants a global recession. The positive talk and the belief that we are getting somewhere is putting risk back on the table this morning with equities forecast to open over a per cent higher in Europe and the UK. GBPUSD is above the 1.58 mark for the first time in a month and is homing in on 1.60 while EURUSD has made gains towards the 1.40 level, also a 4 week high. The weakness in the dollar has meant that GBPEUR has stayed relatively stable and remains in the 1.14/1.17 range at the moment.

The fact that the EU seemingly have a timeline now does not negate headline risk on policy comments this week. We still need clarification how much banks can be expected to lose on their Greek holdings, how to get more money into the banks and whether the European Financial Stability Facility is going to be used as a backstop for sovereigns or for banks. The question over the gearing, or leveraging of the funds in the pot, will also need to be answered soon as must concerns over whether the EU has enough firepower to prevent us being in a similar position in 6 months time for example. There is considerable downside risk to this rally.

Today’s calendar is quiet although it heats up as we go through the week. We do have bond issuances from France and the Netherlands today that should go well given the new found optimism for all things continental. We would expect this rally in risky assets to continue today albeit in a controlled manner.

Have a good week

What the future holds for sterling – Free Seminar

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