25 of the 27 EU members may have agreed to write tougher fiscal rules into national law, but it will take a long time before the detail of the pact is agreed, legislation is enacted and the fiscal compact is complete. 

Greece’s refusal to hand over the reins of its fiscal policy to outside sources may be a perfectly understandable response from a sovereign nation but it does illustrate the limitations of any fiscal control system within Europe. 

The crisis is a long way from being solved.  The lack of any agreement between Greece and its private sector creditors over the size of voluntary haircuts in addition to the clear and increasingly momentum behind fears that Portugal will soon find itself in a similar position are further testament to that fact.  Meanwhile the ECB continues to douse the flames.  Speculation is mounting that the size of the take up at the ECB’s February 29th LTR0 could be in excess of EUR 1 trn as banks that were previously concerned about reputational risk join the herd and take advantage of the cheap money that is on offer.  It remains difficult to judge the extent that banks have used the EUR489 bln lent by the ECB in last month’s LTRO to fund government’s budgets. 

Certainly demand at the debt auctions of stressed Eurozone countries has improved since December.  However, it is possible that banks have been buying up paper to use as collateral at the Feb LTRO.  While this scenario is less supportive since it would imply that demand for paper could slip again after February, it does seem likely that if the size of the next operation is around EUR 1 trn that the sheer amount of liquidity in the banking system would allow for continued support. 

The success of the ECB’s LTRO operations in soothing over some of the fault-lines in the Eurozone is clearly offering the EUR some protection suggesting a period of range trading around current levels could be on the cards.  However, since the crisis still has a long way to run downside risks remain in place. 

We continue to target a move back towards EUR/USD1.2500 on a 3 mth view.  Near-term, support lies in the EUR/USD1.3070/80 region, a beak below could see towards 1.2930.  Resistance in the 1.3280 area.


source: Rabobank