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Markets are “pricing in the endgame” for the euro as the situation moves faster than politicians can act, UBS has warned ahead of a key meeting between eurozone leaders and US President Barack Obama.
The meeting will be held amid Italian media reports that the International Monetary Fund (IMF) is preparing a €600bn (£514bn) loan for Italy. This will give Mario Monti, the new Italian prime minister, breathing space to implement reforms before debt refinancing is needed, La Stampa reported. Speculation is also mounting that Spain may also need to apply to the IMF or the European Financial Stability Facility after its borrowing costs soared last week.
Germany’s cost of borrowing has also jumped, with yields on 10-year bunds moving ahead of the more indebted countries of the UK, US and Japan.
“Financial markets continue to move faster than politicians,” Mansoor Mohi-uddin, head of foreign exchange strategy for UBS, said. “Fixed income investors are betting that either Germany moves towards a fiscal union with its eurozone partners or that, without the ECB willing to buy unlimited amounts of sovereign bonds in the secondary markets, the eurozone will break apart.”
Should further integration of eurozone countries occur, then Germany’s finances will get worse, he said. “If [a closer union] involves fiscal transfers to shore up the single currency area then Germany’s fiscal position itself will deteriorate,” Mr Mohi-uddin said.
Concerns are increasing that the lack of a resolution by European politicians could result in Europe’s problems spreading globally. Canadian finance minister Jim Flaherty said yesterday that the debt crisis is creating “contagion” outside the eurozone. “Again today, we are staring a crisis in the face,” Mr Flaherty said.
Yesterday, Chancellor George Osborne warned that the euro’s collapse would have a massive impact on the UK’s economy.
“We have contingency plans for all situations,” Mr Osborne said. “We have obviously stepped up that contingency planning in recent months, you would expect us to do that as the British government.
“That doesn’t mean we are predicting any particular outcome, we are just ready for whatever ... the eurozone throws at us.”