F/X Weekly Comment

Call me alarmist if you like, but I have a sneaking suspicion that in years to come dinner party conversation in financial circles might go along the lines of 'Do you remember the week it all started to fall apart for the Euro? You know, the week when Greece defaulted and the fuse was lit under Italy? Where were you that week?'

Sterling

Forget about sterling. It wasn't in the game this week. It's all about:


Debt; Default; Doubt.

More a case of where to start really. I was very surprised to see M Sarkozy at Carcassonne airport on Tuesday. I am quite certain that he had more pressing things to attend to, and indeed he did turn up in Brussels on Wednesday for a prolonged chat with his Fellow European leaders, or at least Angela Merkel. I understand this chat did last through til breakfast, but am assured that no impropriety was involved, and their main subjects of concern were their Greek and Italian cousins.

As we all know, the Greek cousin lives in a state of constant excess, and is proving to be an embarrassment to the Euro establishment. It might not come as a surprise to you that the answer to this problem is to pay off half of his gambling and drinking tabs, which adds up to approximately €150bn, and then lend him another €100bn to tide him over. Problem solved, for today.

The Italian cousin is a different matter altogether. A bit of a cad (apparently), his boyish charm has led him to enjoy a charmed life, protected when necessary by law changes and widespread fiscal degeneration, to the extent that nobody twigged until recently that he makes the Greek cousin look like a pillar of financial rectitude.

Let's pop back to the real world for a minute. Greece is defaulting. dress it up however you like, but it cannot and will not repay its debts. And it still needs to borrow more. Italy is fooling the markets no longer. It is no surprise to me that on a day when the markets breathed a sigh of relief that at least a dose of realism has been adopted regarding Greece, Italy paid 6.06% on its 10 year debt refinancing, and didn't manage to borrow all that it needed. That is the highest interest rate since the Euro was created. Levels anywhere higher than this are generally rated as unsustainable.

EFSF
Don't worry about the letters. It's not Euro Folly Shall Fail. It's the Euro bailout fund. A huge pot of money to rescue recalcitrant Euro cousins. Merkozy have decided (rightly) that €410bn isn't going to be enough, and that something in excess of €1trillion sounds more like it. How are they going to get from A to B? Two possibilities, firstly get other people to chip in, such as the cash rich Chinese, or leverage. That is using the original pot to borrow more. If that sound a bit like what got us all into this mess in the first place to you... join the club.


What next?


And so we finished the week at 1.1400. Scant change for all the excitement really. I get the impression that the foreign exchange and money markets are beginning to tire of the Euro Circus and the hype that goes with it. If they start to refocus on fundamentals, as they should, we should see calmer markets. Sterling won't benefit much though until Osborne and King get their act in gear and bring in measures designed to bring the UK back into growth - and those measures will have to be shown to be working.

That won't happen by next week, that's for sure. Sterling to remain under 1.1450 for me.