Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 25th of July.
Much time has been spent arguing the reasons for national bankruptcy for Greece, Spain and Italy though US, UK and Japan have similar or higher debts for long. The governments of US, UK and Japan are not even targeting ambitious budget deficit targets of 3 percent which is now being incorporated in the constitutions of the weaker countries. In fact Britain missed a far less demanding target by a wide margin set by Prime Minister David Cameron in 2010.
Why the financial markets are punishing the peripheral states with crippling high interest rates while US, UK and Japan can borrow at near zero rates without any upper limit? The explanations are varied; from philosophical ones like lack of political and economic convergence to claims bordering on racism, The Spanish are inefficient, the Italians lazy and the Greeks all corrupt.
These over-simplistic and childish explanations (which constantly appear in German and British media) are an anathema to the rationalists (and the economists) because for one, they are factually incorrect.
As per the US Bureau of Labor Statistics, the Italians work 1773 hours a year compared to the Germans who work 1,390. IMF data suggests Italy’s pension liability as a percentage of GDP is lower than Germany.
The reasons are simple; the lucky countries have their own currencies and control their central banks. Hence despite having bigger deficits and worst banking crisis, they are given a free pass by investors.
In reality, the ability to print more money gives governments the power to borrow endlessly. So instead of borrowing money from private investors at unsustainable rates, these governments fund deficits and public spending through borrowings from their own central banks. This is an accounting fiction; taking money from one pocket – the central bank, and putting in another, the Treasury, in exchange for an IOU (or gilts/Treasury note if you please). The Bank of England for example lent the British government £375 billion between 2009 and 2012 when deficits ran around £450 billion. The actual US debt stands at $13 trillion, 20 percent lesser than the $16 trillion on the books if you factor in the Fed’s balance sheet size of $3 trillion.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2818
GBP/US$ – 1.5503
GBP/CHF – 1.5434
GBP/CAN$ – 1.5822
GBP/AUS$ – 1.5162
GBP/ZAR – 13.2210
GBP/JPY – 121.06
GBP/HKD – 12.0177
GBP/NZD – 1.9804
GBP/SEK – 10.8181
EUR: The single-currency edged closer to the psychologically important 1.2000 level against the greenback yesterday as Moody’s downgrading of Germany to ‘AAA Negative’ from ‘AAA Stable’ weighed heavily on investor sentiments, stocking fears that the crisis is now spreading to the core. Also the representatives of the ‘troika’: the IMF, the ECB and the EU reached Athens to negotiate the next round of aid funds, but reports from Greece suggested the country may require two more years to comply with bailout conditions and further €200 billion worth restructuring. Spanish 10-year borrowing costs breached the 7.60 level, prompting speculations of an imminent full-blown request from the Iberian nation. Flash PMI number from the EZ indicated the region is indeed in the middle of a recession. The GBP/EUR traded at 1.2872 over the day’s negative developments and the downward trend is expected to continue today though investors will keep an eye on German IFO numbers. The GBP/USD opens at 1.5528 this morning.
USD: The US dollar index hit its highest level since mid-2010 as the greenback strengthened across the board on fears over the deteriorating European sovereign debt crisis. The GBP/USD however managed to grow marginally to 1.5552 from 1.5486 in morning trade ahead of its Q2 GDP reading on Wednesday. The GBP/USD pair may witness a sellout today if Q2 GDP numbers show contraction of the economy for the third straight quarter, though the cable may show some strength relative to UK’s stronger fundamentals compared to the euro. Some housing data is due from the US today though investors are expected to pile up the greenback unless there is some dramatic improvement in risk sentiments. The GBP/USD apir opens at 1.5528 this morning.
Have a great day!
