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Will Secret German Plan Stabilize the Euro?

Last updated 9/28/2011 5:30 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• La Tribune - Secret plan to stabilize EZ by privatizing Greek Assets
• GE CPI hotter than forecast
• NIkkei flat 0.07% Europe -1.35%
• Oil at $83/bbl
• Gold at $1653/oz.

Overnight Eco

• AUD HIA New Home Sales (MoM) (AUG) 1.1% vs. 8.0%
• EUR German Consumer Price Index (YoY) (SEP P) 2.6%
• EUR German Consumer Price Index (MoM) (SEP P) 0.3%

Event Risk on Tap

• USD Durable Goods Orders (AUG)
• USD Durables Ex Transportation (AUG)

Price Action

• USD/JPY unwinds to 76.50
• AUD/USD takes out .9900 but can't hold it
• GBP/USD ranges at 1.5550
• EUR/USD rallies to 1.3600 but rally capped.

Risk FX reversed its Asian session losses in early European trade today on hopes of resolution for the Greek sovereign debt crisis, but the rally quickly ran out of steam  as EUR/USD stalled above the 1.3600 level while Aussie could not hold the .9900 figure.  Traders were encouraged by the report in the French paper La Tribune which suggested that Germany may have a secret plan to rescue Greece that would involve   putting most of the country’s  public assets in to a single structure that would eventually be privatized. 

According to the paper the plan calls for those assets to be purchased for approximately 125 Billion  euros which will then be used to retire the country’s bonds from the ECB and the EFSF lowering Greece’s debt to GDP ratio to 88% from the present  day level of 145% . The lower debt burden would allow Greece to possibly re-enter the credit markets. Additionally Greece would also see up to 50 Billion euros in infrastructure investment, spurring growth in the moribund economy at the same time as its debt burden would be greatly reduced.

The plan is based on the German model that recapitalized East Germany after the collapse of the Berlin Wall and therefore has precedence, although several analysts have pointed that a pan-European attempt at privatization of Greek assets could be much more complicated. In any event the timetable on the plan is considerably longer with final dissolution scheduled for 2025.  

Should the idea take hold it could spur a massive short covering rally in peripheral debt  as speculators who bet on default would be wiped out.  For now the market is taking the concept with a grain of salt as currency markets focus on the more immediate hurdles such the upcoming Finnish vote on the expansion of the EFSF. However, this proposal has clearly stopped the downside momentum in the euro for the time being  as traders await further action from EZ fiscal officials. The risk of Greek default has diminished but has not fully disappeared and the EUR/USD is unlikely to make much progress until the issue is resolved conclusively.

In economic news the Consumer prices in the state of Saxony  rose at faster pace than forecast increasing by 0.3% versus -0.1% eyed, suggesting that price pressures in Europe’s largest economy remain elevated. On a year over year basis prices rose at 2.6% - above ECB’s target of 2.0%. Saxony is the first of six German states to report CPI data today. 

As we noted earlier, “The Saxony CPI report recorded the highest yearly change in inflation since 2008 and may halt any  discussion of a possible rate cut from the ECB before the year end. Some analysts have speculated that  the ECB may reverse course when Mario Draghi takes helm of the central bank next month. However we believe that Mr. Draghi will want to emphasize policy continuity and given today’s inflation data will be even less inclined to make any sudden changes at the start of his term.“

The euro continues to trade in wide 1.3400-1.3700 range as currency traders continue to focus on the sovereign debt story and with no further economic data on the docket, risk appetite and headline flashes on Finnish approval of the expansion of the EFSF will likely drive trade today.  

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.