Bloomberg News

Euro Reprieve on EU Accord May Be Temporary: Analysts’ Comments

October 27, 2011

Oct. 27 (Bloomberg) -- Analysts discuss the implications for the euro on European leaders’ agreement yesterday to boost the firepower of their bailout fund and persuade Greek bondholders to take 50 percent losses on their holdings.

The 17-nation currency strengthened 0.9 percent to $1.4027 at 8:03 a.m. London time. The comments were collected from reports published by banks today.

Aroop Chatterjee and Yuki Sakasai, currency strategists at Barclays Plc in New York:

“Although the summit takes important steps towards addressing the large scale of the crisis confronting the euro area, the devil is in the details.

“It is possible that the market will be left feeling that too little support was made available to fight the crisis. We can think of a few euro-positive factors. But these are all short-term factors and are unlikely to last over the next few months.

“We remain bearish on the euro over a three-month horizon, as risks to growth in the euro area are likely to become more evident, implementation risks and the potential for fiscal slippage still linger, and the European Central Bank may be forced to ease policy further.”

Steve Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, and Todd Elmer, head of Group of 10 currency strategy for Asia excluding Japan in Singapore:

“The package seems adequate to avoid any euro zone driven financial market catastrophe for the next year or possibly longer, but it is probably not enough to improve euro zone growth prospects a lot and there are a lot of loose ends that could unravel.

“We doubt that this package can bring long-term support to the euro, even as we note that there are a lot of committed dollar sellers out there.”

Chris Walker, a currency strategist at UBS AG in London.

“The most important outcome of last night’s marathon summit seems to be reaching an agreement with the Institute of International Finance that a 50 percent face-value haircut would be accepted voluntarily. This means that in all likelihood the International Swaps & Derivatives Association will rule that the restructuring does not amount to a credit event and credit default swaps payout is not triggered.

“While many doubts remain over the program, the short term reaction of markets has been favorable and risk currencies, including the euro, will likely continue to perform in the short term. However, with the ECB likely to cut rates, we remain skeptical over the longer-term viability of the euro at these levels.”

Kit Juckes, head of foreign-exchange research at Societe Generale SA in London:

“The initial verdict is positive, if only because expectations had been so well managed. The longer-term verdict won’t come from the foreign-exchange market but from the bond market.

“Ten-year Italian government bond yields are still awfully close to 6 percent, and they need to be much lower before anyone can declare the crisis contained, let alone defeated.”

Sue Trinh, a senior strategist at Royal Bank of Canada in Hong Kong:

“Though by no means is the European debt crisis solved, stabilization of the situation in the near term could see market focus switch to the U.S., speculation of QE3 and month end flows, which bias the dollar to the downside.” QE3 refers to a possible third round of asset purchases, or quantitative easing, by the Federal Reserve.

Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London:

“Officials have certainly come up with a comprehensive list of actions but we are certainly still a long way from all the process parts being in place, and thereby we will remain subject to headline risk in the coming months. The announcement is enough to buy some time and generate a moderate risk-on phase.”

Paul Robson, a senior foreign-exchange strategist at Royal Bank of Scotland Group Plc in London:

“The market seems to be giving the deal the benefit of the doubt for now. This isn’t going to necessarily stop the deterioration in the periphery and there’s a risk of contagion. There are worries about the size of the bailout and about who is actually going to put the money up, given that the ECB has been ruled out. Policy makers are hoping that they are going to get buy in from the international community. These are all things to watch.”

--Editors: Nicholas Reynolds, James Kraus

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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