The Pound to Euro exchange rate (GBP/EUR) initially rallied by around half a cent yesterday morning, to reach a daily high of 1.1755, as fears over the sustainability of the Slovenian banking sector spooked investors out of the Euro.
The Organisation for Economic Co-operation and Development (OECD) presented a report in the Slovenian capital of Ljubljana yesterday, suggesting that the country’s banking sector could be in much worse shape than previously calculated. The IMF estimated last month that the Slovenian government needs to bolster its banking sector with around €1 billion to protect against further fiscal shocks down the line. However, the OECD viewed the figures with suspicion and claimed that “capital needs are uncertain and could in fact be significantly higher”.
Markets, and Euro traders in particular, were hit by a barrage of discomfort as the OECD predicted that Slovenian GDP will shrink by -2.1% in 2013 and said that:
“Slovenia is facing a severe banking crisis, driven by excessive risk-taking, weak corporate governance of state-owned banks and insufficiently effective supervision tools”.
Sterling also took heart from an impressive 1.0% monthly improvement in Industrial Production during February. The robust report helped to further alleviate fears that British GDP contracted again in the first quarter. Another quarterly contraction would signal that the UK economy is in a symbolically significant triple-dip recession, and this threat has weighed on Sterling sentiment over the past few months. Alongside the stronger-than-expected Service Sector data last week, the new Industrial Production figure prompted the National Institute of Economic and Social Research to estimate that Britain expanded at a subdued pace of 0.1% between January and March this year.
Early morning demand for the single currency was also hampered by news that German Exports shrunk by -1.5% in February, as the Chinese New Year celebrations were thought to have temporarily slowed down trade between the two nations. Christian Schulz of Berenberg Bank noted that:
“The situation for German exporters remains tense. The Eurozone remains in recession. That should dampen demand for German products for some time”.
However, the Euro shot back up during the afternoon as the OECD concluded that despite the worryingly high levels of bad debts in Slovenia’s banking sector, the Eurozone member state did not require a bailout at this juncture:
“As far as we are concerned, there is no reason to anticipate an immediate need for a bailout”.
Although the yield on Slovenian 1-year government bonds increased by one-third from 2.02% to 2.99% yesterday, Prime Minister Alenka Bratusek re-iterated the point that the country does not intend to request financial assistance. Bratusek told reporters: “We will solve our problems alone”, and stated that the creation of a bad bank this summer will go a long way to addressing the problem of bad assets in the banking sector.
The Pound to Euro exchange rate (GBP/EUR) declined by around half a cent during the afternoon as traders breathed a sigh of relief that Slovenia did not, for the time being, become the next Cyprus. Indeed, European Commission President Jose Manuel Barroso said that he would “not engage” in comparisons between the two nations as it would be “abusive” towards Slovenia: “It is a completely different situation in Cyprus and in Slovenia”.
With little on the economic docket today further developments in Slovenia, or for that matter Cyprus, could continue to colour the Sterling to Euro exchange rate.
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