Another summit to sort out the Euro

The G20 meeting this week is once again overshadowed by the Euro crisis. The main participants from outside the Euro zone have been pleading with the Europeans to come up with a solution that works as quickly as possible. The EU, one of the participants in its own right, has been stung by criticisms into saying they do not need help with finding a way through the difficulties. Meanwhile, the emerging market countries have used the summit to confirm their growing power. They have agreed to make more money available for the IMF, in the knowledge that it could be used to finance Euroland countries in trouble, in return for having a bigger say in IMF deliberations.

The Greek elections produced a result that the Euro establishment wanted. They were able to say that parties which wish to stay in the Euro and accept its disciplines have won. The reality is somewhat different. All the main parties and the majority of the Greek public wish to stay in the Euro. The argument was over the terms of the EU and IMF loan agreements. Under the pressure of the election campaign the traditional parties who will form the backbone of the government said they too wish to see a renegotiation of the terms of the loan. Over the next few days a government will presumably be formed. It will have to ask the EU for some relaxation of the recently signed second Greek loan agreement. The arguments over this will not be helpful for markets.

The seriousness of the Euro problem is demonstrated by the continuing poor performance of the Spanish and Italian government bond markets. There are continuing worries over banks in the Euro system. Equity markets in those countries have been made volatile and often bearish by these developments. The European Central Bank has to keep the banking system liquid, as the interbank market is no longer able to do this given the distrust which stalks the markets in the weaker areas and for the weaker banks. More companies and individuals are withdrawing money from the stressed areas of the Euro zone, compounding the difficulties. The Euro authorities have to inject enough cash and confidence into the weakest parts of the system to make sure there is no damaging run, and to ensure the currency remains freely transferrable at all times.

There is as yet no sign of the confidence boosting growth package which can bring much needed new jobs and output to the recession hit countries. The G20 is worrying about possible contagion from the countries already suffering downturns. We advise that this Euro crisis is still not over or about to be resolved, so we advise caution by investors.