EURO WILL BE HIT BY FEARS OF FRACTURE

BORIS SCHLOSSBERG DIRECTOR OF CURRENCY RESEARCH, GFT

THE euro-dollar opened for trade this week haunted by the same sovereign debt concerns that dogged it the previous week. The problems with Ireland remained unresolved and media reports were rife with speculation that the ECB, EU Commission and the IMF all pressured the Irish government to accept a rescue package. So far, Irish authorities have resisted any attempts at a bailout, insisting they have enough capital to operate until the middle of next year.

It is true that with approximately €18bn of cash on hand, Irish fiscal officials can keep the government running until June 2011. Despite their bluster, market pressure on the Emerald Isle is unlikely to let up as speculators now see the situation as essentially irreparable. With Ireland now shut out from the credit markets as the cost of borrowing has become prohibitively expensive, the country is in an increasingly precarious financial state.

Meanwhile, EU officials are no doubt eager to prevent any further erosion of confidence and to allay fears over the possible fracture of the union. Last weekend Portuguese foreign affairs minister Luis Amado aggravated the situation, saying Portugal faces "a scenario of exit from the Eurozone" if it fails to tackle its economic challenges. This is precisely the type of rhetoric EU officials would like to avoid.

After several months of ignoring the issue the markets are focusing again on Europe’s sovereign debt problems and stability concerns could weigh on the currency for the foreseeable future. Another concern is that German data has started to falter after recording strong growth for most of the third quarter. Since Germany is the financial backstop for the whole EU, any problems there could threaten possible rescue attempts. That’s why yesterday and today’s meeting of European finance ministers could prove critical to the near-term direction of the euro.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com.