EU Summit: Not Enough Progress Made – Pressure Remains on EUR/USD

The leaders of the European Union have made some progress in the first summit on Sunday, and it seems that some kind of watered down compromise will be reached on Wednesday.

It looks far from comprehensive and is likely to weigh on the euro. Here are the main points, and what’s missing to make it a real deal.

1) Greek haircut

The progress: Germany managed to get some concessions from France and especially from bondholders, the banks. The banksare now ready  to up their offer to a 40% haircut, from 21% agreed on July 21.

This is still short of the 50% to 60% demanded by the IMF and Germany. So nothing is agreed yet. This will wait for Wednesday, and the IMF threatens to close the tap for Greece if a big haircut isn’t agreed upon.

Note that this debt cut doesn’t provide a full relief for Greece as it applies only to the private sector, not the Official Sector: the EU, ECB and IMF.

Possible serious solution: A 60% haircut for the private sector AND a similar cut for the ECB will be more in the direction of a comprehensive solution.

2) EFSF Leveraging

In order to ring fence Italy and Spain, some kind of enhancement is necessary for the current bailout fund – the EFSF. France wants to turn it into a bank that can borrow money using leverage from the European Central Bank. Germany strictly opposes it.

Progress made: France has gathered backing from many other countries and the pressure on Germany and the ECB is growing, especially as the president of the ECB, Jean-Claude Trichet, a great hawk, is stepping down in about one week.

Possible serious solution: Germany should give up this demand in return for a bigger haircut and perhaps some other concessions from France. Using the ECB is a swift solution that can also have a side effect of printing money, weakening the euro and boosting growth that is so necessary in Europe, on the brink of recession.

The chances of this happening seem low, but there’s always hope.

3) Bank recapitalization

This is one area that an agreement seems closer. Banks will be required to raise between €100 to €110 billion.

This is far from €200 billion (IMF estimates) to €372 billion by other estimates. Unfortunately this deal seems to be closed, but it isn’t comprehensive.

4) Growth

This was on the agenda on July 21 and is still missing from the agenda. This is what can make a deal very comprehensive indeed.

All in all, the deadlock around the EFSF, the small progress around the Greek haircut and the small deal for the banks are not enough to boost the euro. On the other hand, expectations were already lowered towards the summit.

A small slide in EUR/USD is likely with tension remaining high towards Wednesday.