The pound remained close to a 6 week high against the dollar but continued to struggle against the majority of other currencies.
In its latest poll, Reuters/Ipsos MORI advise that 55% of Britons think that the current coalition government has done a bad job of managing the economy while only 36% believe that it has done well. In particular, 77% of those surveyed expressed dissatisfaction with the government´s track record on unemployment. 60% disapproved of the current taxation policy and another 51% believe that not enough has been done to protect British interests throughout the global recession.
A pickup in risk appetite lessened demand for the US dollar which fell across the board with the Japanese Yen hitting another record high against it.
The euro is making good gains and hit a seven-week high after EU leaders finally hammered out a deal which includes a 50% write down for private holders of Greek government debt. At around 4 AM this morning, euro zone officials reached agreement on a number of issues. Whilst some of the fine detail has still to be ironed out, there seems to be firm agreements in place on many key issues and the reaction of the Asian markets was positive.
The thrust of the agreements seems to be:-
Greece:- The euro zone and the Institute for International Finance (IIF) have agreed on a voluntary ‘haircut’ on Greek debt of 50%, which is expected to allow the country to reduce its stock of debt to 120% of GDP by the year 2020 from 160% now. The big question now is whether this is enough? Many analysts have recently suggested that a ‘haircut’ of between 50% and 60% was necessary, so the above would seem to be the minimum necessary. In addition, the euro zone will offer €30 billion in credit enhancements to the private sector in exchange. The aim is to complete negotiations by the end of 2011, so that Greece has a full financial aid programme in place before 2012. Total EU aid for Greece will now reach €130 billion, up from the €109 billion pledged in July.
On the European Financial Stability Fund (EFSF):- Agreement has been reached on increasing the size of the EFSF. The amount remaining, following aid payments so far to Greece, Ireland and Portugal is approximately €290 billion will be leveraged by around 4-5 times, producing a headline figure of around €1 trillion.
Bank recapitalisations: A deadline of 30 June 2012 has been set for lenders to raise their levels of ‘core capital’ to 9% once sovereign debt holdings have been written down. They also have until 25 December 2011 to submit recapitalisation plans to national supervisors. Spanish banks are expected to have to raise up to €26.2 billion. Recourse to the EFSF will only be permitted as a last option.
European leaders last night also continued to put the pressure on Italian Prime Minister Silvio Berlusconi the urgent need to set an “ambitious timetable” to boost economic growth and cut debt.
In exchange Berlusconi vowed to raise €5 billion annually from asset sales, increase the state retirement age and relax labour laws.
Whilst the markets have so far reacted well to this agreement on Greece, the smallest economy of the 17 member euro zone, it is equally clear that in the case of Italy, the 3rd largest euro zone economy, it really is a case of ‘too big to be allowed to fail but too big to save’.
