Eurozone as we have known it: end of story

1. Greece

Tuesday’s announcement by the Greek Prime Minister, Giorgios Papandreou, of an impeding referendum on the second rescue package concluded a few days before sent market rolling and policy makers tangling in despair and frustration.

It was doubtful that this rescue package would work, but at least it was buying (wasting) a bit more time.

Interesting enough Wednesday’s evening discussion between Merkel, Sarkozy and Papandreou ended up for the first by mentioning the exit of euro for Greece if Greeks vote no to the rescue package, which so far was dumb impossible… As I wrote to JC Juncker in July, Europe lacks credibility and its first task should be to reinstate it: For 2 years, the opposite way has been followed by a succession of denials and scapegoating.

If I were Greek, I would go straight away to my bank and get all my cash to hide it under the mattress; so, expect a run on Greek banks that are bankrupted anyway with their load of junk Greek sovereign debt.

November-December 2011 debt redemption schedule:

11 November: EUR 2 bn (26 wk T bills) + 49 mio interest

18 November: EUR 1.6 bn (13 wk T bills) + 18 mio interest

12 December: EUR 2 bn (26 wk T bills) + 50 mio interest

23 December: EUR 2 bn (13 wk T bills) + 46 mio interest

According to Papandreou, Greece has enough money to survive until mi-December, so just after the referendum due to take place 4^th December.

Well, if there is a referendum (there are rumors it would be called off; what a farce!!): Papandreou called a vote of confidence for Friday; if he does not win then new elections would be called and the referendum becomes history. The EU and IMF would provide Greece with its EUR 8 bn 6^th tranche from the first EUR 110 bn rescue package.
Alternatively a Government of national union could be formed with the opposition. This would be the best outcome for the EZ and the euro.

2. Italy

Friday’s bond auction witnessed an interest rate increase to 6% (so before Papandreou referendum announcement) and since, borrowing costs have reached a record high (10 year bonds reached a high of 6.399% today), not seen before the creation of the euro. The cost of debt is not sustainable.

Wednesday evening Berlusconi could not get cabinet approval when his Northern League ally refused to increase the retirement age from 65 to 67 years as demanded by Merkel-Sarkozy for the G20 meeting in Cannes, which castes doubts about Italy’s ability to implement unpopular measure to reduce its (slowly) mounting debt.

Whilst Italy’s economic situation is on many indicator much less worse than France’s, its weak political system, large legacy debt and slow growth are making the country the target of markets.

France is however not far behind.

3. France

On many indicators, France is in a worse situation of Italy: debt increase (will soon catch up Italy), primary budget deficit, trade balance and unemployment.

The 2012 budget is based on a 1.75% real GDP growth that will not be reached: the consensus stands at 0.9%. This means finding EUR8-9 bn to maintain the objective of deficit reduction down to 4.7% in 2012 and 3% in 2013. However, most of the rumored measures are in the form of tax increase and not economies. Yet with the previous EUR11 bn deficit reduction announced a few weeks ago, EUR1 bn was made of cost cutting whilst EUR10 bn were tax increases. France has always the tendency to increase taxes instead of reining in it overload civil service (in particular with local authorities which has boomed for the past 10-15 years).

Markets are taking notice and spreads with Bunds have trebled since early July:

France is next in line (together with Belgium) and is at risk of loosing (should loose) it AAA rating which is the cornerstone of the EFSF together with Germany’s AAA. Any downgrade will pressure rates at which the EFSF borrows ; yet, Wednesday, the EFSF had to postpone a EUR3 bn bond issue schedule in the next fortnight and 10 yr spread over German Bunds increased to 1.5% from 0.7% in September.

The current crisis exemplified, if needed to be convinced, that the construction of the EU and EZ is a Franco-German affair. Whilst Germany is clearly in the driving seat (in the end who gets the money decides), there still is an appearance of equality between the two countries: would France loose its AAA, this balance would be shattered and Germany could, politely, pursue its own interest, eastwards…

Conclusion

France is the hidden weak link of core EZ and this begins to appear openly. I very much doubt that France will be able to abide by its budget deficit forecast without number muddling (France can always call on the CDC – a large French state-owned financial institution- to get a couple of billions euros).

After this crisis, the EZ cannot be the same: the way it works, decisions taken, budgets voted, Maastricht criteria respected (or even more stringent ones: no budget deficit), money spent, will make the EZ, if it survives, a different planet. Even its perimeter can be challenged. I still believe that a narrower EZ with a euro DM is a possible outcome: the question is, would France be part of it?
Anyway, Europe will be German or will not be.
03 Novemberg 2011

Source:

Bloomberg: Europe’s Financial Crisis Deepens as Greek Government Teeters

http://www.bloomberg.com/news/2011-11-03/europe-s-financial-crisis-dominates-g-20-talks-as-greek-government-teeters.html

Bloomberg: Berlusconi Arrives at G-20 ‘Empty-Handed’ After Vowing Economic Overhaul

http://www.bloomberg.com/news/2011-11-03/berlusconi-arrives-at-g-20-empty-handed-after-vowing-revamp.html

Financial Times: EFSF postpones €3bn bond issue

http://www.ft.com/cms/s/0/47f3998e-0546-11e1-a3d1-00144feabdc0.html#axzz1cdb7yxNB

Time to short the banking sector?

After being hit hard (and for a reason), the banking sector posted fantastic gains:

	High	Low	Close	H to L	C to L	C to H
S&P 500 Banks	414.75	46.72	131.45	-89%	181%	-68%
	Feb-07	Mar-09	18-Sep-09
FTSE 350 banks	11696.3	1877.1	5308.74	-84%	183%	-55%
	Feb-07	Mar-09	18-Sep-09
DJ Euro Banks	491.78	84.61	231.75	-83%	174%	-53%
	May-07	Mar-09	18-Sep-09
DJ Stoxx Asia Pacific banks	96.93	32.97	56.96	-66%	73%	-41%
	May-06	Mar-09	18-Sep-09
Topix Bank Index	508.18	125.65	150.72	-75%	20%	-70%
	Apr-06	Mar-09	18-Sep-09
Hang Seng Financial	4932.55	1718.91	3573.2	-65%	108%	-28%
	Nov-07	Mar-09	18-Sep-09

Are these sustainable (at least in the developed world)?

• Banks profitability is driven by the endless open check book provided by central banks around the world at 0% or near 0% financing cost whilst investing in US treasuries or equivalent and getting around +/- 3% for 5-10 years maturities. Despite the rhetoric, central banks are more interested in banks increasing their shareholders funds than increasing lending to consumers and companies. The decrease in lending accelerated in July to an annual rate 10.4% (7.4% the previous month) according to data from the FED.

• Whilst having improved, balance sheets are still weak despite deleveraging, capital increases seen for the past 12 months and write-downs. According to today's FT:

  There is mounting concern among industry professionals about how to restructure or refinance the $2,100bn of European commercial property loans, in particular the $200bn in CMBS. [Commercial Mortgage Backed-Securities]

  A report from the UK industry group that met with the Bank highlighted that the UK commercial property sector could be in negative equity until 2017 and undercapitalised by up to £120bn ($195bn) based on current conservative banking refinancing terms.

  Close to £43bn of loans to the commercial property sector are due for repayment this year alone, according to De Montfort University research.

  Half of the outstanding European CMBS market needs to be repaid in 2011 and 2012, and CMBS in default have already proved difficult to restructure.

• In the US, the situation is not much rosier. Since the beginning of the crisis, the FDIC (Federal Deposit Insurance Company - the body that insure deposits) has spent approximately $50 billions and is now underfunded (see graph below). Write-off on US commercial real estate loans could amount up to $400 billion. Add increased delinquency for credit cards and you get the picture.

• Banks are again mulling calls to their shareholders to raise new equity, Royal Bank of Scotland being the last one to queue. With banks showing profits again during H1 2009, investors would have thought that they should not need to come to the markets again so soon. This lead me to be suspicious about the solidity of banks' balance sheets, and I am not convinced by the argument where new equity is needed to get freer from Governments: they need to raise capital because their loan losses are high and rising. The latest release from Institutional Risk Analytics shows that bank stress in Q2 2009 was at the highest level ever.

Conclusion

Between being short or being long, I would choose the former since too many uncertainties are lingering at this juncture of the crisis in the banking industry which benefited from the central bank largess. And I do not expect anything great from the G20 meeting in the US if I refer to the previous meeting in London where tax havens were wrongly targeted and now traders' bonuses seems to be the next scapegoat. I however still scratch my head with leading indicators having improved for 5 months in a row...

Sources:

Financial Times
European property groups face debt time-bomb
http://www.ft.com/cms/s/0/a29bce72-a60e-11de-8c92-00144feabdc0.html

Federal reserve Statistical Release
Consumer Credit
http://www.federalreserve.gov/releases/g19/Current/

John Mauldin
Thoughts from the Frontline Weekly Newsletter
The Hole in FDIC
http://www.frontlinethoughts.com/gateway.asp

Institutional Risk Analytics
Q2 2009 Bank Stress Index Ratings
http://us1.institutionalriskanalytics.com/pub/IRANews.asp

Northern Trust
Loan Delinquency and Charge-Off Rates at Troughs of Business Cycles
http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0909/document/dd091809.pdf

New regulation in the financial sector: US and Europe

I reproduce in extenso RGE Monitor's Newsletter regarding new proposed financial sector's regulation in the US and Europe:

"As decided at the latest G20 meeting, authorities around the world are devising micro- and macro-prudential reforms in order to strengthen the resilience not only of single financial institutions but of the entire financial system by extending oversight to all important financial institutions, products, and activities.

The United States

In the U.S., the Obama administration introduced its widely anticipated regulatory reform proposal on June 17. Its five main components include:

1. The establishment of the Fed as systemic risk regulator and supervisor of “too-big-to-fail” institutions in return for Treasury permission requirement for extraordinary liquidity programs. The plan proposes creation of a “Council of Regulators” (formerly the President’s Working Group) chaired by Treasury but with advisory powers only;
2. The creation for the first time of a regulatory regime for all financial derivatives, as well as a requirement that the originator, sponsor or broker of a securitized vehicle retain “skin in the game” – i.e., a financial interest of at least 5% in its performance;
3. The creation of a new Consumer Financial Protection Agency with rules against predatory lending and transparency standards at the retail level;
4. A new resolution mechanism that allows for the orderly divestiture of any non-bank financial holding company whose failure might threaten the stability of the financial system, including investment banks, large hedge funds and major insurers such as AIG;
5. Adopting a leadership role in the effort to improve and coordinate global regulation and supervision.

The main points of contention in Congress are likely to include the scope of the new regulatory powers conveyed to the Federal Reserve in view of the arguably minimal use it made of its already existing regulatory powers in the run-up to the crisis. Equally controversial are the need and the powers of the new Consumer Financial Protection Agency. Furthermore, some policymakers and market participants are equally worried about the potentially stifling effect of too much regulation on financial innovation.

The European Union and Switzerland

Two days after the Obama plan’s introduction, on June 19, EU leaders reached agreement on a new framework for coordinated (rather than unified at EU-level) macro- and micro-prudential supervision along the lines proposed by Jacques de Larosiere and endorsed by the European Commission on June 9. Regarding the macro-prudential authority, the new European Systematic Risk Council (ESRC) will comprise EU central bank governors and will most likely be chaired by the ECB president. The Council will issue financial stability risk warnings and macro-prudential recommendations for action to supervisors and monitor their implementation. In contrast to the U.S. Federal Reserve, however, EU central bankers will not oversee and regulate systemic cross-border institutions directly. ECB vice president Lorenzo Bini Smaghi, in a June 19 speech, deplored this discrepancy.

The EU agreement also establishes a new micro-prudential authority at EU-level. In particular, the European System of Financial Supervisors, comprising three new European Supervisory Authorities, will help ensure consistency of national supervision and strengthen oversight of cross border entities. This will be accomplished by setting up supervisory colleges and establishing “a European single rule book applicable to all financial institutions in the Single Market.”

Importantly, the new EU-level supervisory authority will have binding decision powers in the case of disagreement between the home and host state supervisors, including within colleges of supervisors. EurActiv cites the following example: “If Italian and Polish supervisory authorities disagree regarding recapitalization of an Italian bank operating in Poland, for example, it would be the new EU-level authority that would settle the issue with binding decisions.” However, EU leaders are clear in their agreement that “decisions taken by the European Supervisory Authorities should not impinge in any way on the fiscal responsibilities of Member States.” This precludes any ex ante burden-sharing provision, a very controversial issue. As EurActiv explains: “Should a major financial institution fail, there will be no European competence to establish which countries will have to foot the bill and by what means. National interests are likely to prevail again on this issue.”

Up until now, then, an EU-wide resolution regime for cross-border banks remains unaddressed. While this is welcome news for Britain, which worked hard to confine any EU interference to a minimum, smaller EU countries as well as non-EU countries with large banking sectors have a problem.

Not by coincidence, Philipp Hildebrand, vice president of the Swiss National Bank, noted on a June 18 speech: "The lack of any clearly defined and internationally coordinated wind-down procedure contributes to a de facto obligation on the part of the state to provide assistance to these institutions." Small countries, in particular, will need to develop wind-down rules for crisis situations. One possible consideration, according to Hildebrand is to "split off those units of a bank that are important for the functioning of the economy and wind down the rest."

‘The rest,’ of course, might include foreign EU operations in need of domestic backing. In terms of pro-active regulatory interventions, the Swiss have been at the forefront with an overall leverage cap for their large institutions, an innovative ring-fencing framework for bad assets at UBS, and a risk-adjusted remuneration scheme at Credit Suisse (i.e., to pay top bankers based on the performance of the toxic waste they originated or acquired on behalf of the bank).

The UK established new resolution powers for national institutions in the Banking Act 2009 in the aftermath of Northern Rock. Large and complex financial institutions, however, still await a comprehensive solution, a fact noted in Mervyn King’s June 17 speech. He noted that “one important practical step would be to require any regulated bank itself to produce a plan for an orderly wind down of its activities,” i.e. akin to making a will. That kind of information would also be a valuable input for the new EU cross-border regulators.

Alternative Investment and Derivatives Regulation

In the U.S., the President’s plan requires all advisers to hedge funds and other private pools of capital, including private equity funds and venture capital funds whose assets under management exceed some modest threshold, to register with the SEC under the Investment Advisers Act and provide sufficient information for effective systemic risk supervision. Similarly, under the EU Commission draft regulation, managers of hedge funds and similar ‘alternative investment funds’ that handle at least €500m (€100m for those using borrowed money) would have to be registered in trade repositories and provide information about leverage. For now, the draft law applies only to managers, rather than funds, because many funds are based offshore. After three years, the rules will get tougher for funds based outside the EU. Although the EU plan was under heavy attack by the industry, the latest U.S. backing should put any hope of a reversal to self-regulation to rest.

New rules in major financial centers also require all financial derivatives to be brought under the regulatory umbrella. As part of the U.S. plan, standardized credit default swaps (CDS) and other over-the-counter (OTC) derivatives will be required to clear through a central counterparty and trade on exchanges and other transparent trading venues. More customized products will be required to register with a central registry that makes aggregate data available to the public and detailed positions for regulators. In the European framework, the UK secured that the new EU supervision will not cover clearing houses for derivatives – an important objective for the City of London who is global leader in terms of trading volumes of derivatives."

I will have only one comment (besides the fact that I do believe that State regulation will sow the seeds of further and even more damaging crises - just look at the increasing indebtedness of States in the West for the past 40 years): the emerging markets' banking system is in much better shape and does not need to increase regulation. Interesting...

Source:

RGE Monitor's Newsletter: June 24, 2009
http://www.rgemonitor.com/

Tax Havens, Politics and Scapegoats (3/3)

Scapegoats

On the question of transparency, which seems to be central to discussions regarding tax havens, the OECD established a Framework for a Collective Memorandum of Understanding on Eliminating Harmful Tax Practice where:

Each party will ensure that its regulatory or tax authorities have access to information regarding beneficial owners of companies, partnerships and other entities organized in its jurisdiction, including collective investment funds, and to information on the identify of the principal (as opposed to agent or nominee) of those establishing trusts (settlors) and foundations under their laws and those benefiting from trusts and foundations.

Clearly, the State of Delaware in the US does not comply.

The very interesting study conducted by Bruce Zagaris, a Partner of the Washington based law firm Berliner Corcoran & Rowe, demonstrates the double standard applied:

Some U.S. states, such as Alaska, Delaware, and Nevada, have enacted asset protection laws to attract persons, especially foreigners, seeking protection from creditors. (…) Delaware has advertised that its new trust law ensures “confidentiality of information and records.”

At least two other states, Montana and Colorado, have offshore banking laws designed to attract foreign investors by offering tax exemptions, confidentiality, and ease of establishing accounts and doing business. (…) especially the fact that Colorado's was enacted in 1999, after the release in May 1998 of the OECD's initial report on harmful tax practices.

(…)

The state of Delaware also is trying to attract business based on its laws and reputation as a domicile where corporate debtors can quickly obtain bankruptcy.Virtually no OECD country requires corporations to keep ownership information on file with a central or other governmental authority on a routine basis, except for certain types of corporations, although the OECD HTC MOU requires the targeted countries to do so.

Interesting enough, On June 23, 2008, Brazil's Congress published Law 11,727/2008, which, effective as of January 1, 2009, will amend Brazil's transfer pricing regulations and expand the legal definition of tax havens. The surprising news in all of this is that it is widely believed that these changes were made specifically so that the exotic state of Delaware could be designated as a tax haven, or at least a jurisdiction with the characteristics of one.

Paul Mason, from the BBC, analyzed what happened at the G20 meeting in London regarding the OECD list. It appears that last minute negotiations occurred between Sarkozy, Hu and Obama not to include Macau in the grey list of the OECD. But, hold on, wasn't it the OECD that was establishing the list independently...? This BBC story is worth reading!

So, all countries attending the G20 meeting escaped in one form or another to be named and shamed, whilst the usual small countries were used as scapegoats for the crisis. Making the public (read the voter) thinking that tackling tax havens and putting them under the control of large deficit countries will solve the crisis, is ludicrous.

Clearly tax havens make tax hells losing tax receipts; this is however a drop in the ocean of accumulated budget deficits over the years from lax budget spending (voting bribery?) and poor public governance, governance hailed however by the very same politicians as the new Graal of the New World Economic Order (don't misread: I very strongly support governance in general and corporate governance in particular as well as I believe its lack of it is one of the roots of the financial crisis).

In addition, imagine what would happen to tax rates, if low taxation jurisdictions did not exit. Already, The US, the UK and Ireland announced an income tax increase; this is only the beginning of the tunnel. And why blaming countries that are managing their budget in a proper way and do not need punishing taxation?

What to conclude?

First, China showed once again its power on the international stage and will become more and more assertive
Second, Continental Europe is firing a bullet in its foot as usual: the reading of the OECD list is self explaining.
Third, the US and UK continue successfully to divert attention away from their backyard: do what I say and not what I do...
Fourth, the G20 meeting and the preceding negotiations about the OECD list showed the lack of transparency and governance from countries that insist on them, and discredited the OECD.
Fifth, Large countries found their scapegoats: small, well managed countries that offer high living standards to their populations; instead of following their path, they point the finger at them as responsible for the financial crisis (one of the two causes of the crisis was outlined by President Sakorzy in October as being tax havens - a joke! -).

Tax Havens, Politics and Scapegoats (2/3)

Politics

It seems that we are going towards the legitimation of the the strongest, biggest financial centers and tax havens while smaller countries and territories are stigmatized.

Indeed, the OECD found that its definition caught certain aspects of its members' tax systems (most developed countries have low or zero taxes for certain favored groups). Its later work has therefore focused on the single aspect of information exchange. This is obviously a flawed decision. This single criteria for defining a tax haven is inadequate and goes against common sense, but is politically expedient because it includes the small tax havens (with little power in the international political arena) but exempts the powerful countries with tax haven aspects such as the USA and UK.

For example one of the most permissive location for business is the State of Delaware in the US (where Joe Biden, the current Vice-President, was a senator). Let’s review it quickly:

• 43% of companies on the NYSE are incorporated in Delaware (over 400.000 companies i.e. +/- 1 company for 2.5 inhabitants and growing)
• Significantly low income tax levels (below 6%)
• No need to disclose the beneficial owner of assets (Delaware having passed the test of transparency, no jurisdiction should be included in the OECD list)
• Partnership taxation laws which make it favorable to non-US entities, typically allowing taxation at 0% where the partners are registered in non-US jurisdictions
• Anti-hostile takeover legislation and strong protection of companies’ management
  

If you want more detailed information, go to the State of Delaware official website

To summarize and according to the State of Delware web site:

"Corporations choose Delaware for the following reasons:

1. Ease of incorporating,
2. Business-friendly climate,
3. Fast services provided by the Secretary of State's Office and
4. Delaware's Court of Chancery. (Our Court of Chancery is well known for its ability to issue timely decisions on complex corporate matters, and its wealth of case law ensures consistent answers to corporate questions.)
If you form a corporation in Delaware, you are required to pay an annual Franchise tax to the Delaware Department of State for the privilege of incorporating in Delaware. Franchise Tax is based on the number of the corporation's authorized shares and costs a couple of tens of dollars."

Funny enough (well, not so funny) the Delaware Statutory Trust has been widely used for structured finance deals such as asset securitization.

Let’s review the politics during the G20 meeting and their interaction with the OECD list.

Tax Havens, Politics and Scapegoats (1/3)

Tax Havens

The G20, hailed as a success, was nothing more than a political gathering aiming at communication (see post "G20 summit and today's markets" April 2), the most for the French President, Nicolas Sarkozy, who threatened to walk away if he did not get what he wanted: tax havens MUST be scrapped since Sarkozy, in October 2008, identified them as one of the two causes of the financial crisis...

Here we are. The OECD published on April 2 a list of non or not co-operative enough countries or supposed to be. Funny enough, Uruguay, Malaysia and Philippines were on the black list: didn’t you know that these countries were tax havens? (they were moved, together with Costa Rica from the black list to the grey list on 7 April). Didn’t you also know that Hong Kong, Mauritius, Dubaï, Saint Barthelemy in the French West Indies or Delaware in the US to name a few were not tax haven?

Funny enough, the OECD makes a distinction between tax havens and other financial centers: are they tackling tax havens or something else? We will see this later on.

In any case, the credibility of the OECD has zoomed down to zero!

Remember, the fight against tax havens took a boost after 9/11; it was aiming at fighting more efficiently Al Qaieda and money laundering from crime in general.

Let’s go back to 1998 when the criteria where laid down by the OECD to pinpoint a tax haven. There are three criteria (the absence of a requirement that the activity be substantial was abandoned by the OECD in 2001):

1. No or only nominal taxes. Tax havens offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence
2. Protection of personal financial information. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.
3. Lack of transparency where one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively

In the next article you will discover how politics melted in.

G20 summit and today's markets

Markets reacted very positively to the G20 announcements (full press release). In essence:

• More regulation and overseeing of the finance industry, and for the first time hedge funds
• More money ($1.1 billion in all), in particular to the IMF that will treble its available resources to $750 billion and see its role strongly reinforced
• More transparency with tax havens

The rest is rhetoric and we will see how the details of today's decision develop. I however note that the reasons for the crisis (lax monetary policy, over indebtness, poor governance and incompetence) were in no way dealt with in the communiqué nor the solutions to cleanup banks balance sheets; this is left to each country to decide.

• More regulation is still vague on its form and implementation, whilst regulators should have done their job right in the first place: why should they be better in the future? I feel we need better regulation, not more regulation.

• More money? Fine, this will bring more well paid employment to Washington. At least it will leave governments not directly involved in baling-out some countries in Eastern Europe and elsewhere. After all, when one sees the disunity in Europe about the subject, it is politically easier and probably more efficient to let international organisations take care of it. Remember nevertheless that the $1.1 trillion (1) is not funded (2) will be spread over 2 years and (3) represents +/- 5% of all money committed by States individually and collectively as well by international organisations. However, this probably is the most interesting part of the summit.
  

• More transparency with tax heavens? Luckily the conference took place on the 2nd of April, but what a joke! The well-timed publication of the OECD progress report on tax heavens (dated April 2) would be quite fun if the matter was not serious. I could not find the Delaware and Nevada (US), St Barthelemy (France), Hong Kong and Macao (China), or Dubaï, and the list is far from exhaustive. Governance and equity should start with Head of States. True, politicians are back in force, and I am afraid, this is not good news for the future.

I am therefore not as enthusiastic as most commentators (where they waiting for the worse after postures played by some countries like France? - usual politician tactic to make sure they will show to their public (1) the conference is a success and (2) each of them is the victor). I however do not dismiss that the rally will continue for some time since the Conference did not end up in shamble.

Markets reacted positively to the summit, extending their early gain in Europe with Germany up +6.07% and the UK +4.28%. The Dow passed the 8,000 mark but did end up at 7,978, +2.79%.

The ECB surpised with a 25 b.p. rate cut to 1.25% vs a 50 b.p. the market was expecting. At the press conference, ECB president Jean-Claude Trichet did however say that the current level is "not the lowest limit", suggesting at least one more 25 b.p. cut.

The EUR rallied vigorously ending the day +1.7% at 1.3463.

Precious metals were under pressure with markets rallying and the G20 meeting announcing the sale of gold (limited amount however at approximately 5% of IMF holdings). Gold ended down 2.3% at 905.33/oz, off the lows of the day ($895.25/oz).