Euro Euphoria continues

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Despite the lack of details provided markets reacted positively to the European summit announcements which highlighted that decisive action for tackling the debt crisis will be taken. Banks shares experienced a relief rally and the three largest French banks were up 19% on the day with even Greek bank shares showing a rise.

This morning the FTSE is up 25 points, a 0.4% gain and the Dax in Frankfurt is nearly 1% higher while in Paris the CAC has added 0.8%.

The strength of the euro continues and today the euro-dollar rate hit the 1.41 level while the sterling-euro rate dropped to 1.13. However a wave of weak data in the Eurozone reminded the markets that the problems in Europe are still far from over. Consumer and business confidence worsen in October, economic sentiment slipped to a 22 month low whilst consumer confidence declined 0.8 points on September’s figures.

We have to also bear in mind that despite the reaction to Wednesday’s decision there is still some important issues that remain unsolved. The 50 percent haircut on Greek bonds agreed will still leave Greece’s debt at an unmanageable 120 percent of GDP by 2020. That leaves serious fears on the insolvency on Greece which might need another write-off sooner than expected.

The European banks will face a 12.5% increase in the amount they must set aside to provide for losses. Their ratio of capital to risk assets (loans etc., weighted by risk) will rise from 8% to 9%. However the risk is that banks might increase their capital ratios by lending less, rather than taking strings-attached government money which might ultimately affect growth in the European countries.

On the other hand the details of how the new bailout fund will be raised remain uncertain and will probably not be revealed until November. The biggest question of the lot is about where all the money will come from. It was hard not to infer anxiety at the way EFSF chief Klaus Regling hurried straight to Beijing from the meeting in Brussels. President Sarkozy went on TV to say he would accept contributions from China even though he did not need them but that if he were to receive them they would not give China any hold over France. It was all slightly embarrassing.

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Euro Euphoria continues

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