Chutes and Ladders

The euro is leading the recovery in the foreign exchange market as speculation mounts of a deal at the EU summit later this week.  It has raced to almost $1.4220 after testing $1.40 yesterday. 

There talk suggest three options are being considered:

1)  A debt buyback scheme with credit enhancements for the private sector.  This would seem to trigger a selective default rating or something comparable. 

 

2)  The French spin on the "Vienna Initiative", no credit enhancement, no debt buy back, though lower rate, longer maturity on EU/ new loans from EFSF on more favorable terms.  This also would likely lead to a selective/partial default. 

 

3) Taxing financial sector, lower rates/longer maturities. 

At the same time ECB's Nowotny hints at potential of another ECB climb-down by suggesting that even in the case of some kind of default, the ECB could accept Greek bonds as collateral, under certain conditions. 

There is of course more than a little skepticism about these well timed "leaks" of discussions.  The problem with all these proposals are that they are not scale-able.  The solution for Greece 2.0 must be applicable to Portugal and Ireland as both may need new assistance too.   This is why these proposals will seem like insufficient to finally get closure on the debt crisis.  Many argue that only a substantial move toward fiscal union is needed. 

The German ZEW survey was mixed.  The assessment of current conditions improved, which was not expected, but the sentiment component--forward looking--was weaker than expected.    The IFO and flash PMI in the cominig days are more important, but in general, the euro zone economy appears to have lost some momentum as Q2 wound down and Q3 began. 

In the US, it looks like a compromise is in the works too.  However than compromise means that July 22 is not the key deadline as previous suggested by some.  It looks now like there will be an attempt to vote on the Republican plan.  It would pass the House, but lose in the Senate.  It is for show.  Then a deal worked out will allow the debt ceiling to be raised with limited Congressional support--that is Democrat--support. 

The yen is frankly boring--largely flat in tight ranges against the dollar and losing ground on the crosses, reflecting the strength of the other currencies.  What catches my eye is that margin accounts in Tokyo--is short yen against the dollar in size not seen in a few years at least.    This offers stark contrast with the long yen positions building at the IMM.  In the week through last Tuesday, the net speculative position doubled to 28k contracts.  It is as if the famed Mrs Watanabe is "betting" on BOJ intervention, while the foreign specs are more skeptical.