The euro had a tolerable day on Tuesday, due to renewed rumours of an agreement between France and Germany to boost the European Financial Stability to €2 trillion. Despite a subsequent Dow Jones report that the story was incorrect it gained credence, encouraging investors to plough back into equities, oil and commodity currencies.
Meanwhile in Greece a 24hour general strike began today as the Greek Parliament gets ready to vote on more austerity cuts demanded by international lenders. The protests highlight the level of public frustration with the cost cutting measures the government has taken in an attempt to reduce Greece’s deficit. A survey showed that the majority of global investors expect the Greek government to default on its debt obligations.
Moody cut Spain’s credit rating again by two notches from A1 to AA2, the third downgrade since 2010. Also to note Fitch and S&P have both downgraded Spain this month. High levels of debt in the banking and corporate sectors leave the country vulnerable to funding stress and worsening growth will make their fiscal targets even more challenging. The downgrade puts more pressure on Eurozone leaders, who will meet this weekend to discuss a solution for the crisis. Merkel confirmed the summit this weekend will be an important step but not the final step that will miraculously resolve the crisis
Portugal has unveiled deeper cuts; as part of its €78bn bailout agreement. Mr Gaspar the finance minister said that the country should still be able to pull out of recession by 2013. Some workers could see their annual income cut by 24% next year.
This week Sterling has been in lower demand. A week after reporting a 15-year high for unemployment the CPI inflation rose to 5.2%, matching the record high of three years ago. Whilst it is true that the Bank of England did warn that a reading above 5% was likely this year, the number served as a reminder that pounds will be worth less tomorrow than they are today.
Bank of England governor Mervyn King said in a speech last night that inflation is at the peak and he expects inflation to start to fall back. Unfortunately his words were not supportive of the pound. He emphasized a “recognition of losses and a substantial injection of additional capital” are needed to restore market confidence. This follows on from the Bank of England’s October meeting where policy makers voted unanimously for this month’s restart of quantitative easing, and considered injecting even more than the £75BN agreed. King pointed the finger at China and Germany stating they should share greater responsibly in responding to the current crisis and expand domestic demand.
A further knock to the pound came with his final comments on UK recovery. We had been on track until now; however “the problems in the euro area and the marked slowing in the world economy have lengthened the period over which a return to normality is likely.”
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