Davos headlines hit the euro

It has been the overwhelming and pervasive negativity emerging out of the World Economic Forum in Davos from some of the world’s foremost financial commentators that weighed heavily on the single currency on Wednesday. Billionaire George Soros claimed that European governments had “done everything wrong”, and that if the euro collapsed then it would be a catastrophe for the global economy. Kenneth Rogoff described the euro as a “halfway house that doesn’t work”. Angela Merkel reiterated that Europe’s imbalances would need to be corrected while IMF chief Lagarde threw a real spanner into the works by asserting that public sector creditors would need to participate in Greek debt-restructuring if the contribution from the private sector was not sufficient.

Intriguingly, there was a very rapid riposte from the ECB to Lagarde’s comments. Unsurprisingly, the ECB remain firmly opposed to any restructuring of its debt, which it claims was acquired purely for monetary policy purposes (and in particular to make up for the inability of European politicians to agree on how to deal with Greece’s debt problems with sufficient urgency). Last week, Mario Draghi said that the ECB was not a party involved in the discussions on a Greek debt-restructuring. Amidst reports that the Greek debt discussions are in disarray, there was also the entirely justifiable claim from the Kiel Institute that the debt load of Greece would remain “unbearably high” even if public sector creditors agreed to participate.

For the second time in consecutive days, the euro reached 1.3050 before sliding over the course of the morning to below 1.2950 in response to the various comments from Davos. A real tug-of-war is taking place currently between short-coverers and sovereign wealth funds on the one hand and corporates and leverage funds on the other.