Currency Watch: Summit up, but euro problems remain

So the most significant European summit since Maastricht has concluded, and where do we stand?

Well, European politicians, especially the “Merkozy double act”, went much further than most market participants expected; with a fair few agreements in principle on bank recapitalisation and expansion of the European Financial Stability Facility (EFSF).

However, the markets will need positive figures soon, and viable figures at that, if they are to take this overnight rally any higher.

As far as the currency markets are concerned (and specifically activity around the single currency) expect more volatility in the short term.

The positive market movements, which followed the announcement of the new euro package, have all the hallmarks of an “Emperor’s New Clothes” rally; the masses jump into a moving market and will exit quickly unless the dream is kept alive.

If someone dares to point out that we still are in the dark as to how to leverage the EFSF, or that a leveraged number of €1 trillion is woefully short of where it needs to be, then markets, along with the Emperor’s fictitious clothes, are likely to fall off.

The risks to this agreement, and the good sentiment surrounding the markets at the moment, are the rating agencies. France is where they will be focussing next.

Moody’s already put Société Générale, BNP Paribas and Crédit Agricole on review for a potential downgrade in mid-September.

The losses on Greek debt will be the catalyst for ratings downgrades to these banks, and this could well be followed to the French losing their AAA rating. And that can’t be good news for the global economy.

Jeremy Cook is chief economist at World First foreign exchange