Dexia saved but Euro crisis still festers

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It’s been another weekend focused on the Eurozone with ratings downgrades, bank nationalisations and joint statements all coming out and adding more confusion to an economic situation that was complicated before the politicians got involved.

Late Friday Fitch issued notes downgrading both Italy and Spain for varying reasons. The decision to cut Italy was not a surprise as both S&P and Moody’s have led the way on the Italian economy and Fitch was merely catching up. The Spanish decision is different however but cites similar reasons why they are fearful over the country namely an inability to reduce the level of debt while dealing with weak growth figures. The poor PMIs from the region last week will not have helped the country’s cause.

Unfortunately the ratings agencies are likely to remain in the headlines this week as well following the news that the bank that everyone said would go bust was nationalised over the weekend by the French and Belgian governments. The weight of Dexia, (EUR4bn alone to the Belgian government) will likely see Belgium’s rating cut in the coming week or so with Moody’s already placing the country on a negative watch on Friday. Full details of the plan to create a “bad bank” that holds bond and other toxic debt will be announced later today. We will likely see increases in bond yields on French debt today as the markets will digest the impact of the nationalization on the French balance sheet and whether it constitutes enough to see a ratings downgrade away from AAA.

Finally in Berlin, we had yet another joint communiqué from Merkel and Sarkozy. The French President said “By the end of the month, we will have responded to the crisis issue and to the vision issue”. This sits in nicely with the scheduled European Finance Ministers’ meeting at the beginning of November and could lead to a co-ordinated strike from governments and the ECB as markets increasingly price in a rate cut from Frankfurt at next month’s gathering.

Needless to say that with all this focus on Europe, we could have seen mass anarchy on the streets of London and it would have been a byline feature. Even so, there was nothing too UK-centric over the weekend with front pages focusing on the futures of Defence Secretaries and X-Factor participants with the business pages broadly in favour of the Bank of England’s recent expansion of quantitative easing.

Markets are expected to be fairly quiet this session with both the US and Canada on holiday. There is of course the risk that headlines lead to further volatility. One garnering headlines at the time of writing is the news that Erste Bank, an Austrian lender, is going to need an extra year to repay state funding supplied to keep it afloat during the crisis. With Dexia only just saved it will only exacerbate fears over the future of the banking system in Europe.

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Indicative Rates Sell Buy
GBPEUR 1.1554 1.1581
GBPUSD 1.5575 1.5600
EURUSD 1.3464 1.3487
GBPJPY 119.46 119.74
GBPAUD 1.5830 1.5857
GBPNZD 2.0121 2.0150
GBPCAD 1.6087 1.6117
NZDUSD 0.7727 0.7751
GBPZAR 12.30 12.35
USDZAR 7.8900 7.9413
GBPPLN 5.0109 5.0386
EURJPY 103.29 103.56

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