The pound has remained in close contact with the Euro today at 1.210, whilst the majors have posted significant gains in the lead-up to tomorrow’s rate decisions from the European Central Bank and the Bank of England. Both the commodity currencies – (due to improvements in the gold and oil market) and the safe haven currencies have performed well today in a strange scenario that sees investors wary of rate cuts or further quantitative easing in the European marketplace.
If interest rates are cut, both the Pound and Euro would lose investors to the Dollar, even though it would theoretically help improve liquidity and tempt markets into riskier investments. The problem with trying to improve liquidity at this delicate time for the financial industry is that banks are freezing cash funds in efforts to safe-guard their own refinancing needs over the next 3-years.
The vast majority of the ECB’s €489 billion cash injection just before Christmas has been deposited since then, leaving businesses and consumers with no significant improvements in credit. In Greece rogue loan sharks have raked in the cash, at the expense of many a broken leg, but in Italy the money-lending has been undertaken by an altogether more sinister organisation… the mafia.
The mafia has overtaken Italy’s largest oil corporation ‘Eni’ as the country’s biggest business. Business group ‘Confesercenti’ indicates that the Italian crime syndicate has an annual turnover of €130 billion. Confesercenti President, Marco Venturi, has described the situation in Italy as an economic epidemic: “Among the illegal activities of mafia organisations is loan sharking, which with the economic crisis has become a national emergency.” Without the necessary credit opportunities from the banks, Italians have found themselves in grave danger when defaulting on mafia debt.
Tomorrow’s rate changes will be crucial; no change could be seen as a positive affirmation of strength, but it could also show a lack of leadership; whilst a rates cut could help improve liquidity and attract risk appetite, but conversely it could send investors across the Atlantic to the Dollar.
By Josh Ferry Woodard
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