Could The G7 Spark A Euro Rally?
A highly anticipated call among G7 leaders is scheduled for today, with some expecting a European resolution – whether forced or agreed upon – to surface. However, the reality of such an event is relatively unlikely given the group’s previous record and Germany’s staunch advocacy of no European bonds. The sentiment could ruin what has been a good couple of sessions for the Euro, after finding its footing circa the 1.2400 support level.
Germany continues to remain against any type of European bond structuring as such an arrangement would derail it’s own plans to tap global capital markets. In this type of arrangement, other European countries, and their credit ratings, would be mutualized with Germany’s stellar credit rating – essentially pulling down the country’s triple AAA rating. The situation would make it increasingly unlikely that Germany would be able to freely access the kind of capital it is being offered recently. In addition, a mutualisation of German and other EU periphery bond ratings could, as German Chancellor Merkel has stated in the past, return the EU back to the days of overspending and leveraged lifestyles. The notion would essentially worsen the region’s economic woes and create an even worse situation.
Aside from Germany’s unwillingness to be exposed to such a risk preventing a resolution, the G7′s effectiveness towards global policy is unlikely to produce anything other than a commitment towards a future solution. This has happened in the past, with the most recent being a coordinated intervention in the Japanese yen. Although G7 leaders intervened unilaterally in the currency markets to stem further yen appreciation, the aftereffects were short lived on one-off commitments.
For any real Euro retracement to occur, G7 leaders will need to highlight a detailed plan of attack, if not cajole Germany into participating in its region’s efforts towards a quick and viable resolution. Without any real substantial evidence of a solution, further speculation is likely to be heightened of either Greece or Germany leaving the EU in the next year – placing added weight on the Euro.
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