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Weekly CZK Report - EFSF expansion approved

Weekly CZK Report - EFSF expansion approved

14.10.2011 17:03
Autor: Tomáš Vlk, Patria Finance

This week focus was on the debt crisis. The start was positive thanks to some previous weekend events. German and French leaders pledged to present a plan for banks by the end of the month, which brought optimism to the markets. A hope that an action is coming and will be aimed at stabilizing the banking sector helped to keep positive sentiment for a couple of more days.

Besides that, Belgium, France and Luxembourg agreed a plan for Dexia (0,71 EUR, -5,06%). Moreover, Troika inspectors said that Greece will likely be able to get another tranche of international aid in early November. This should provide the Eurozone with some more time for implementing the plan for banks.

A solution for banking sector is now crucial for financial markets ‘sentiment. Although no details are out yet, it is nearly sure that involvement of the EFSF will be necessary. But this would not be possible unless the fund is enlarged and retooled. Slovakia was the last EMU member voting about the EFSF and it refused the expansion. Markets awaited the decision with worries, but in the end, negative reaction was not significant. Shortly after the first vote, Slovak politicians said they agreed on ratifying the EFSF bill. A part of the deal is also a preliminary election in March after the current government has fallen. Slovakia ratified the EFSF on Thursday, which was widely expected and the market reaction was, therefore, minimal.

The Eurozone is still seeking a way to push down sovereign debts and ensure stability at the same time. Private sector will bear a part of the losses. They must be big enough to relieve Greece and other troubled countries. But on the other hand, banking sector must withstand the losses, helped by new capital injections. The plan for banks should provide details about the concrete measures.

G-20 finance ministers meet to discuss rescue measures for the Eurozone. Boosting the IMF lending resources is at play and stance of the BRIC countries will be very important. Such a measure would obviously raise chance that the rescue plan will be successful and would drive the euro higher.

The ECB provides the banking sector with liquidity, extending its programs. It also still intervenes on the bond markets and buys Spanish, Italian and other debt. On the other hand, the ECB said it had already done its maximum and the fight against debt crisis was now up to politicians. Moreover, the central bankers still oppose the involvement of private investors.

Overall, this week markets have been quite optimistic about the solution. Stocks went up and so did the euro that continues above the 1.38 mark. But the influence on the CE currencies was not very strong. The koruna has only slightly strengthened compared with last week.

Czech inflation came out close to estimates and has not changed the view on interest rates. Unemployment was slightly lower than expected but it is a lagging indicator that does not hint on economic prospects. The current account brought a disappointment as it showed one of the largest monthly gaps. It was due to a big dividend outflow and a deficit on trade balance. This figure had a negative impact on the koruna. Next (2601 GBp, -0,31%) week Czech PPI is scheduled; it should be neutral for the market.
Focus will be still on news about the EMU debt crisis – any obstacle on the way to solution for banks would be negative. There are also some interesting data on the program: soft indicators from the US industry, the German ZEW and Ifo indices and also a couple of Chinese figures including the 3Q GDP.


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