Euro has rallied of late
Event risks abound near term
The euro has rallied over the past month against most of the major currencies, including sterling and the US dollar, supported by the belief that the ECB will resume the purchase of sovereign debt, an expectation that has taken some of the tension out of euro bond markets. Yet September carries a number of substantial event risks, many with the potential to re-ignite investor concern about the future of the single currency, so it promises to potentially be a very significant month for the markets in general and the euro in particular, according to Bank of Ireland’s Monthly Bulletin published today, 31 August 2012.
Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist Bank of Ireland said: “The most important event is the decision by the German Constitutional Court on the ESM and the Stability Treaty, scheduled for the 12th, as German and hence European policy has been in limbo awaiting that ruling. Most observers doubt that the Court will reject the ESM, hence destroying the permanent firewall in the euro area, but some expect that the Judges could impose restrictions and constraints on German participation. The Netherlands has also yet to ratify the Stability Treaty and holds a General Election on the same day and that has the potential to throw up an anti-austerity Government and the prospect of a Dutch referendum on the Treaty.
“Spain and more specifically the capital needs of the Spanish banks was a key market concern and September is also likely to see a decision by the new Government there on how much it will seek in support from the EU and whether that request will extend beyond the banking sector and include the State. The ESM can directly support banks but only if a single banking supervisor is in place, and the European Commission is scheduled to unveil any progress on that issue on the 11th, including its thoughts on a Banking union.
“The ECB proposal to buy short-dated sovereign debt is conditional on purchases by the EFSF/ESM so any problems with the latter will in turn impact the Bank’s plans to support bond markets under stress. The details of that, including the issue of ECB seniority to other bond holders, have yet to be unveiled and the market’s expectation regarding more clarity on these issues at the upcoming ECB meeting may be disappointed. That meeting could well resort to more conventional monetary policy measures, however, including another cut in the repo rate, or at least the flagging of that prospect.
“Finally September may also see Greece again in the spotlight as euro policy makers have chosen to await the next Troika report before making any decisions. Germany appears to have ruled out any fresh loans so the issue of a Greek exit from the zone is also likely to re-appear adding another risk to what could prove a very eventful period,” concluded Dan McLaughlin.
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