In Canada and around the world, a little-considered industry is dying a slow death.  The Canadian government can save and revitalize this industry, and perhaps spur a new technologies revolution in the Great White North.  What would require this change?  The Canadian government would simply need to ensure that the intentions of a well-meaning group of diverse government representatives are carried out and not distorted, at least in Canada.

In the last two decades governments and private entities around the world have funneled significant resources into the detection and prevention of money laundering and terrorist financing.  Like many other countries, Canada’s Department of Treasury established a national agency to combat money laundering and terrorist financing.  The Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) is Canada’s financial intelligence unit, created to collect, analyze and disclose financial intelligence on suspected money laundering and terrorist financing activities.  FINTRAC regulates life insurance companies, securities dealers, casinos, banks and others, including the lowliest of financial services providers, money services businesses (“MSBs”).  MSBs are usually providers of alternative financial services, such as currency exchangers, cheque cashers and money transmitters like Western Union.

FINTRAC may impose significant penalties on MSBs, banks and other financial services companies (“Financial Institutions”) with deficient anti-money laundering controls.  While FINTRAC’s fines to date have not been intimidatingly large, financial services companies of all stripes are subject to fines which may run into the millions of dollars, as well as criminal prosecution of senior management, which could lead to prison time.

The threat of fines, prison and reputational damage resulting from a poor FINTRAC audit result looms over Financial Institutions.  In particular, the people at Financial Institutions tasked with ensuring a predictable and glowing FINTRAC audit result are the daily grinders in their compliance departments.  While other Financial Institutions staff members, such as commercial lenders, traders of all stripes and C-suite executives perform their jobs with a dual focus on risk and reward, compliance department staff sees the world more starkly.  They balance risk and more risk.  The first risk is the actual risk of money laundering and terrorist financing.  The second risk is the risk of fines and reputational damage to their institution.  Each poses a material risk to their employment – the third risk.

As a result of this institutional reality, all business deemed to have a high risk of money laundering or terrorist financing is turned away.  Who decides where this high risk business is to be found?  The Financial Action Task Force (the “FATF”) does.  The FATF is “an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing”.  The Task Force is therefore a policy-making body and its policies have become dogma.  These policies include a set of guidelines known as the FATF Recommendations and the FATF Special Recommendations (collectively the “Recommendations”).  A critical component of the Recommendations is the running theme imploring Financial Institutions to perform customer due diligence, also known as know-your-customer reviews (“CDD” or “KYC”).  An emphasis is placed on the value of face-to-face business relationships.

Special Recommendation VI places a clear target on “money or value transfer services” (read: MSBs), which “have shown themselves vulnerable to misuse for money laundering and terrorist financing purposes.”  Special Recommendation VI goes on to recommend that MSBs be regulated, which is reasonable enough. However, the MSB industry’s reputation was decimated when the FATF described MSBs as “vulnerable to misuse”.  Perhaps with the exception of 800 pound gorillas such as Moneygram, Western Union and Pay Pal, MSBs became the scourge of Financial Institutions the world over.  “Vulnerable to misuse” became “risky”, which became “high risk”, which became “not worth losing my job over – sorry tourists, you’ll have to pay a king’s ransom to exchange money at your hotel” (hotels never register as MSBs even though they probably should); and “sorry online MSBs other than Pay Pal, you must live in constant fear of losing your banking relationships.”  The fact that the Recommendations merely promote regulation as a preferred policy somehow got lost in the shuffle.  In recent years many, many MSBs have dissolved as a result of lost banking relationships.  Parties wishing to establish new MSBs have found it virtually impossible to find a banking partner, not only in Canada, but in most first world countries.

Let’s assume the Financial Institutions, and the people running their compliance departments are correct in every way.  The risk of providing banking services to MSBs is usually not worth the limited revenue that may come from an MSB other than the 800 pound gorillas.  If something goes awry, someone could lose a job by failing to terminate the services provided to a company labeled ‘high risk’.

Can anyone do anything to assist Canada’s helpless, honest and tarnished MSBs?  In this case, the governmental agencies that participated in drafting the Recommendations can step in to support their own policies.  After all, the Recommendations provide that MSBs should be regulated, not decimated.

The FATF website lists a number of Canadian governmental agencies as participants in the FATF.  These include the Department of Finance, the CRA, the RCMP and many others.  What if the Department of Finance or FINTRAC were willing to indemnify Financial Institutions against any liability resulting from their dealings with regulated Canadian MSBs?  As a policy matter, what effects would this have?  Probably good ones, including:

• More small and honest MSBs would be able to keep their banking relationships and stay in business
• Some informal MSBs may register with FINTRAC
• New MSBs would receive banking services, keeping money transfer and foreign exchange prices lower for consumers and creating some degree of competitiveness among MSBs
• Canada could become a launching point for new MSBs with a focus on new technologies – e-wallet and m-wallet companies might pass over foreign jurisdictions with larger populations to first open their doors in Canada because of its reasonable regulatory environment
• Financial Institutions would have no risk from their dealings with companies regulated by FINTRAC; if an MSB is found to have facilitated money laundering or terrorist financing FINTRAC can shut it down and penalize the MSB’s owners and staff appropriately

Currently, FINTRAC audits MSBs sporadically.  This leaves the compliance departments of financial institutions relegated to a place where they can only hope that their MSB clients are not being used for money laundering or terrorist financing.  However, if an MSB could voluntarily subject itself to frequent FINTRAC audits, bi-annually, quarterly, etc., then the Financial Institutions could take comfort that the government watchdog is ensuring that MSB best practices are followed.  MSBs may even be willing to pay for increased audits as a form of insurance against lost banking relationships.  In this situation, Financial Institutions would almost certainly welcome back MSBs.

In conclusion, the FATF’s Recommendations provide that MSBs should be regulated because they are vulnerable to money laundering and terrorist financing.  This Recommendation has led Financial Institutions compliance departments to stop their institutions from accepting MSBs as new customers, and in many cases, to terminate their existing relationships with MSBs.  If Canada’s representatives on the FATF are serious about the policy of regulating MSBs instead of destroying MSBs, then they could save the industry’s smaller and Canadian-headquartered players by simply indemnifying Financial Institutions from any penalties resulting from providing services to regulated MSBs.  The Department of Treasury could add one simple line to the Regulations:  “No Financial Institutions shall be fined or otherwise penalized under these Regulations for providing services to a regulated money services business”.  The result of ensuring that the Recommendations are carried out as intended would result in a more diverse and therefore stronger financial services industry in Canada.

This Reg-E extension will require consumer remittance providers to disclose 3 things for each transaction:

1. the fx rate applied,
2. the fees applied, and
3. the actual amount of money to be delivered.

Banks are given an extra year to comply, until Jan 2014, whilst everyone else in the industry must be in compliance by January 2013.

Why are banks given a break and an extra year?

Likely its because they would have no hope otherwise – given how SWIFTs are processed!  Intermediary correspondents clip transactions along the way, and recipient banks assess egregious lifting fees and fx spreads. The sending institution often has no visibility into the actual amount of money delivered, never mind the hapless consumer.  Cash-based MTOs like Western Union, Euronet, and MoneyGram who control both sides of the network just don’t have the same issues.  And hyperWALLET’s global bank transfer service is based on a global network of local ACH settlement relationships which are lifting-fee-free, so meeting requirements (1), (2), and (3) is not a problem for us.

The only new rule which is slightly irritating to hyperWALLET dictates that consumers must have ‘at least 30 minutes to cancel a transfer, & get their money back’.  We already have an undo button for all transactions prior to remote delivery, and its only a few lines of code to implement a fixed-duration posting delay, so its no hassle for us to meet this rule.  But  it is still irritating because many of our correspondents like Mobile Money schemes and even many ACHs are providing near real time clearing, so implementing  an arbitrary 30 minute processing delay arguably reduces our quality of service for the vast majority of customers who won’t want to cancel their payment.

But what of the banks,  who will have a lot of work to do to make their wire services compliant with the core fee transparency aspects of the legislation?  My prediction is that many of them will do the math and decide that they don’t have sufficient SWIFT-based consumer remittance volumes to justify the investment necessary to reach compliance. These banks may reclassify their wire services as available to ‘business’ account holders only, taking them out of the consumer remittance game altogether.

But there is a better approach, which would be for banks to leverage hyperWALLET’s Global Money Transfer Service.  This provides consumers with compelling, simple remittance services, in compliance with the new requirements, and a profitable new service for banks.

We believe consumers interact best with email and SMS messages, not MT103s.

The innovation can help financial services companies and multi-nationals send money globally in a low-cost, low hassle manner, and in accordance with anti-money laundering and anti-terrorist financing best practices.    The software behind the patent permits a person to receive funds electronically without having to be a member of the system responsible for transferring the funds or being a member of the same system as the person sending the funds.

Probably the best way to explain the innovation is by way of example. Bob in the United States is sending money to Sally in Singapore.

Sender-Directed Payments work like this:
Bob provides Sally’s SWIFT bank account identifiers to his U.S. bank or Foreign Exchange Service Provider.  At the bank, He’ll pay a hefty international wire sending fee.  Sally receives no indication that the funds are on their way.  If everything goes well, Sally will see the funds in her Sing bank account in 2-3 days, less a hefty international wire reception fee.  If things don’t go well, (the SWIFT instructions are incorrectly entered by Bob, or incorrectly transposed by a correspondent bank along the SWIFT trail), Sally’s money won’t arrive and Bob and Sally have a painful, time consuming, relationship-impacting, and expensive experience ahead of them playing the trace game.  And for sender-directed first-time SWIFTS, “things don’t go well” 20% of the time!

Recipient-Directed Payments work like this:
Bob emails money to Sally through a 3^rd party payment service like PayPal, Western Union,  hyperWALLET. He’ll pay a nil or modest sending fee to his provider. The provider notifies Sally in real time that a payment has been received from Bob and is available for delivery.  Sally provides her local bank account identifier to the service.  If everything goes well, Sally will see the funds in her Sing bank account in 1-3 days, less a nil or modest local delivery fee.  If things don’t go well, (Sally’s instructions are incorrectly entered by Sally, or incorrectly processed by the provider) Sally’s money won’t arrive and Sally must deal with the provider to sort the issue out.  For recipient-directed first time instructions, “things don’t go well” in about 3% of cases.

Recipient-directed cross-border payments are:

• easier for senders to initiate,
• much less expensive, particularly for lower-value payments
• provide similar or often superior end-end settlement timing to SWIFT services,
• provide better payment status transparency for both parties via email/text notifications,
• incur 6-fold lower error/exception/return rates

The BIG problem with recipient-directed payments is that both the sender and the recipient must be members of the same service in order to benefit from these advantages: banks or 3^rd party providers which are licensed and regulated in only the sending jurisdiction can’t offer services to Sally.

hyperWALLET’s innovation solves this problem, allowing  Bob’s bank or FX provider to offer international email payments which yield all the benefits of recipient-directed payments, but without requiring the foreign recipient to register for a 3^rd party (or any new) service. From a regulatory perspective, our solution allows Bob’s provider to receive and act upon instructions only from Bob, not the foreign beneficiary.

We’ve been utilizing this software for our own corporate customers for some time now, and are pretty excited about making the solution available to banks and other payment brands in 2012.

Another European Summit and disagreement once more, but this time the UK was the thorn in Europe’s side. United Kingdom Prime Minister David Cameron refused to sign a new EU treaty that was drafted by Angela Merkel and Nicolas Sarkozy imposing strict budget and debt rules to not only the eurozone states, but also the other non-eurozone members in the EU. Britain, one of the countries that sits outside of the eurozone (thank goodness), led by Prime Minister David Cameron, refused to agree to the new treaty, saying he wanted guarantees protecting the UK’s financial services sector, which relates to one-tenth of the UK’s economy. Sarkozy said that Cameron’s demands were unacceptable and so the UK was left “out in the cold” as 26 of the 27 EU states agreed in principal to the new treaty. It has been many years since a UK Prime Minister has stood up to Europe to ensure that UK interests are not brushed under the carpet, but by taking this stance Cameron risks the Eurosceptics within his own Conservative Party of raising the issue that Britain should hold a referendum on whether the UK should leave the EU altogether, which it joined in 1973. Cameron has stated that this not an option, as the effects on the UK economy would be horrendous, but it will be interesting to see how he deals with both his own party and the issue of Europe in the coming months.

After the above events were digested, the meeting turned towards resolving the eurozone debt crisis, with many thinking that this was the last chance to save the euro from collapse and financial meltdown spreading across the global economy. Decisions were taken yesterday on the permanent bailout fund, the European Stability Mechanism, which is due to be in force by July 2012. However, once again promises that had been made before the meeting fell short of expectations. The ESM’s threshold will be set at €500 billion euros, far less than had been pledged before the meeting. Germany also opposed giving the fund a banking license, as had been originally suggested by Herman Van Rompuy, the President of the European Council. The license would have allowed the ESM to access cheap funds from the ECB, and by not agreeing to this Daniel Gros director of the Centre for European Policy Studies think tank in Brussels said, “This is a great leap sideways. We now have a framework that in 10 years’ time could restore a degree of fiscal order to the euro zone. The German view is that this is all that is needed to convince markets to buy Spanish and Italian debt. I have my doubts that it will be enough. I think the tensions continue.”

The eurozone was however given a boost yesterday when the European Central Bank cut interest rates by 0.25% to 1% to help combat the debt crisis that has engulfed the region. The euro was sold off on the back of this news and also lost more ground when news of the summit agreement hit the markets. However, despite all of the bad news that has been emanating from Europe over the past few weeks the euro has been very resilient, but the failure to get Britain to agree to the treaty and the view from many investors that the additional €200 billion euros being lent to the IMF to help bailout the weaker eurozone countries is not nearly enough, are all negative factors for the euro in the months ahead. The uncertainty about whether the eurozone will be able to halt the crisis and bring stability to the region forced investors to dump higher-risk assets and commodity driven currencies such as the Aussie and Kiwi dollar, for the safe haven of the U.S. dollar.

As the summit came to a close today we are still left wondering whether the meeting has been any more successful in dealing with the eurozone debt crisis, than the other dismal attempts in the past few months. Yes they have agreed a roadmap for greater economic integration between EU members in the future, but once again they have failed to deliver a credible solution to the debt crisis that is threatening to engulf Italy and Spain. A Reuter’s poll of 57 economists taken before the summit began showed that even though 33 of them felt that the eurozone would survive in its current state, 38 expected the summit would fail to deliver a resolution to the debt crisis. It seems they have been proved right.

Weekly Market Commentary – Week Ending 25/11/11

It seems each week the troubles facing the eurozone just keep mounting up and the disastrous consequences of a complete break-up of the euro become a distinct possibility. This week alone has seen Germany’s Chancellor Angela Merkel insist that the European Central Bank would not act as the “lender of last resort”, even though Portugal has had national strikes and had its sovereign debt rating downgraded to junk status by Fitch, Italian bond spreads have reached record highs again and reports that Dexia Bank may require further emergency funds to prevent it from going under. What will it take until Merkel gets it that the euro is teetering on the brink of collapse whilst she stands by and watches it sink.

As a result of all the past week’s events equity markets have plunged as investors sought the sanctuary of safe haven assets such as the dollar, which today hit fresh seven week highs against the euro following Italy’s disastrous bond auction this morning where yields hit 6.5% to borrow over six months, double what it paid last month and much higher than analyst’s expectations. The real concern now for Italy is that in the last week of January it must refinance more than €30 billion of bonds and if the market refuses to take up the auction and the ECB has not changed its stance, then Italy could be forced to default and it may well spell the end for the euro. The only hope is that the ECB and Merkel will be pressured by other eurozone countries to change its stance and an article printed in the Financial Times today may well suggest that could now be a possibility. The article states that the Dutch, who have since now taken the same stance as Germany, seemed to have relented and endorsed the ECB as being the lender of last resort. The news has come as welcome relief to the euro and eurozone, but it is Germany’s word that will be final and as yet they have not indicated they are about to change their minds any time soon.

As mentioned earlier the dollar has been the biggest winner on the currency markets this week as fears about the eurozone and general economic health of the global economy pushed investors to seek the shelter of safe haven assets such as the U.S. dollar. The euro on the other had has been sold off this week and as Manuel Oliveri, currency strategist at UBS in Zurich put it, “Merkel sees no scope for euro bonds and the ECB continues to make it clear it sees no scope for financing public debt. Without agreement on either of those two factors there is not much chance of an improvement in sentiment toward the euro and we think it can go lower from here still.”

The Canadian dollar also lost out this week and again today, hitting a seven week low against the U.S. dollar as investors shied away from commodity driven currencies. Today’s decline came after the Italian bond auction stoked fears that the ever increasing debt crisis could lead to a break-up of the currency bloc. The loonie was also not helped by the thin trading volume due to the Thanksgiving holiday in the States yesterday, where currency movements can be exaggerated due to illiquid markets.

The markets will be back in full swing on Monday when once again all eyes will firmly be focused on the eurozone and more importantly what Angela Merkel and Germany are going to do to put an end to the crisis. The concern is that if she sticks to her guns over the coming weeks and insists that the ECB and Germany will not sanction a bailout of Europe’s sovereign debt, then the euro will most certainly break-up and Mrs. Merkel will go down in history as being the reason for its catastrophic failure.

Weekly Market Commentary – Week Ending 18/11/11

The escalating crisis in the eurozone took another turn for the worse this week when Italian, Spanish and French borrowing costs soared to near record highs and plunged the eurozone to the brink of collapse once again. It prompted the new European Central Bank President, Mario Draghi to admit his disbelief at the level of action taken by eurozone governments to deal with the crisis. He commented, “Where is the implementation of the long-standing decisions? We should not be waiting any longer.” Many analysts now believe that the only way to prevent contagion spreading across the eurozone region is for the ECB to “Print Money” and buy up vast quantities of Italian, Greek, Spanish and French bonds in the same way the Bank of England and the Federal Reserve pumped vast amounts of money into their respective economies in their own forms of quantitative easing measures.

However, trying to find consensus within the eurozone is like trying to find a needle in a haystack.Germany does not feel that the ECB should buy up these bonds and instead feels eurozone member states should stick to the agreement formulated when they met in Cannes earlier in the month to strengthen the European Financial Stability Fund by the December deadline. The worry is that if borrowing costs continue to rise the ECB may have no option but to act, otherwise the “unthinkable” may actually become “thinkable”. Some brighter news did surface yesterday and today in the eurozone after Mario Monti, Italy’s new Prime Minister not only survived a vote of no confidence but also announced new measures helped at tackling Italy’s rising debt mountain. As a result of this news and speculation out today that the ECB may start lending funds to the IMF, the euro reversed some of its losses from earlier in the week and was some 1 percent up against the greenback alone today.

Sterling continued to lose ground earlier in the week dropping to October lows against the dollar, but better than expected retail sales data out yesterday halted sterling’s slide and gave the pound some welcome support. Retail sales rose at an unexpected 0.6% in the month of October against a forecast of a drop of -0.3%. However, further gains were limited after reports suggested that the Bank of England may feel the need to increase its own asset purchase program beyond the £275bln target in order to keep its 2% inflation target on track. The dovish tone set by the Bank of England is likely to weigh heavily on sterling and many analysts predict a bearish outlook for the pound over the coming months.

In the U.S markets the dollar lost ground against most of the majors overnight and in the European trading session today after speculation the ECB may act to support the eurozone and Italian Prime Minister, Mario Monti winning a vote of no confidence, helped accelerate gains before the opening bell in New York. As in the eurozone, the U.S.has its own debt problems, which was reiterated by New York Fed President William Dudley who stated that the Federal Reserve would do “everything” in its powers to put life back into the U.S.economy as it still faces “significant downside risks”. As such, many feel that the door has been left open for the FOMC to increase its own quantitative easing measures and all eyes will turn to next week’s deadline for the U.S.“Super-Committee” to propose substantial budget cuts to help try and reduce its own debt mountain.

Finally, in Canada data out this morning showed annual inflation eased slightly in October, after posting a near record high in September. The consumer price index rose 2.9% in October, dropping from September’s 3.2% prompting traders to pull back expectations on the Canadian central bank cutting interest rates over worries about European and U.S. growth. The loonie strengthened to session highs this morning in the U.S. and as Camilla Sutton, Chief currency strategist at Scotia Capital put it, “The gains were fairly broad based. That limits the ability for the Bank of Canada to turn too dovish with still rising inflation in Canada, and it’s positive for the Canadian dollar.”

Weekly Market Commentary – Week Ending 11/11/11

Another week of turmoil in Europe has concluded with Italy’s parliament pushing through austerity measures aimed at halting Italy’s own debt crisis and the wider eurozone’s spiraling out of control. The sudden call to action by the Italian parliament had a lot to do with U.S. President Barack Obama heaping pressure on eurozone leaders to get their house in order. The vote to push through a new budget law in Italy paves the way to finally replace Silvio Berlusconi and form an emergency government. Under Berlusconi’s reign as leader of Italy their economy has grown at the slowest pace compared to any other country in the world, only being eclipsed by Zimbabwe and Haiti. He seemed to be more interested in throwing his now infamous “Bunga Bunga” parties than dealing with Italy’s economic woes. As a result of his negligence Italian bond yields hit a staggering 7.5 percent this week, pushing the eurozone to the brink of a bailout it just does not have the money for.

As well as the Italian parliament needing to take action this week, in Athens today the Greek parliament swore in their new Prime Minister Lucas Papademos, a former ECB policymaker, whose job it will be to prevent the country from going bankrupt by agreeing to the bailout terms set down at the recent Cannes summit of eurozone leaders. Many believe that this is just papering over the cracks and delaying the inevitable – a Greek default and exit from the euro. It was also muted today that the bailout fund (European Financial Stability Fund) being set aside to tackle the problem was struggling to raise the €1 trillion euro’s pledged at the same meeting, even though many still feel the amount needed is closer to €3 trillion.

The thought of Italy defaulting on its debt and exiting the euro do not bear thinking about and as such ECB policymaker Ewald Nowotny stated “The most important element to overcome the crisis is a very trusted and able new Italian government that can really fulfill the structural changes that are needed.”

The news of Italy’s parliament agreeing to pass the new austerity measures and the belief that Berlusconi’s reign is coming to an end pushed the euro higher today, but many fear that this will be short lived as even a new Italian government may struggle to deliver on the fiscal reforms like so many others have done in the past. As well as the euro strengthening, yields on Italian 10 year bonds fell significantly dropping below the crucial 7 percent barrier to 6.6 percent, but as one bond trader put it, “We can have maybe two or three days of calm, but nothing has really changed”.

Sterling reached 8-month highs against the euro yesterday, gaining on the back of Italy’s woes this week, but its gains were short lived after the Bank of England left interest rates on hold and made no changes to its quantitative easing program. The greenback also lost ground yesterday after worse than expected weekly jobless claims, the worst since April, indicated that the U.S. economy was still far from on the mend.

As for the Canadian dollar it has been a good week, gaining both from the easing euro concerns yesterday and domestic trade data coming in stronger than expected. A sudden rise in energy exports meant Canada posted a trade surplus in September, it’s first since January, indicating that the Canadian economy would return to growth in Q3. Further gains were limited after the data release due to the early closing of the Canadian bond market and traders squaring their positions due to the Remembrance Day holiday in Canada and Veterans Day holiday in the U.S.

The holidays have been a welcome relief for investors to what has been another turbulent week for the global economy. However, the calmness will not last for long as when the markets are back into full flow come Monday all eyes will be firmly focused on Europe, especially after yesterdays Italian and French Industrial production figures showed an alarming decline in September. Contagion across the region is now not just becoming a concern, but as we can see from the events in Italy this week, a distinct reality.

If you still feel that the eurozone crisis will be solved by bailouts and fiscal reform then I will leave you with the words of George Soros:-

“This crisis is potentially bigger than the crash of 2008, because we have survived the crash of 2008 and we have not yet survived this one. There is a danger if they get it wrong then you have a financial meltdown. If there is a disorderly default in Greece, and the rest of the euro zone has not been insulated from contagion, then you could have a meltdown not only of the Greek financial system, but of the European and in fact the global financial system because we are so interconnected.”

I had been hoping to talk of a brighter future for Europe this week, but a week on from Europe’s so called “Eurozone Rescue Package” to resolve the debt crisis which is crippling the eurozone, Angela Merkel and Nicolas Sarkozy summoned Greek Prime Minister, George Papandreou to an emergency meeting at the G20 Summit in Cannes. They asked him what in the name of Zeus was he doing calling for a referendum on his country’s bailout package. He was told in no uncertain terms to backtrack on the referendum or face receiving no bailout funds. As Sarkozy said, “We wish to continue building Europe and the euro with our Greek friends. We have done everything we could to achieve this, but there are a certain number of rules that are the bedrock of the solidarity pact, and it is up to the Greeks now to decide whether they wish to continue on this road together with us or not.”

As I see it the above is a clear indication that chaos and confusion remain, but at least something is happening. I believe Greece are going to have to leave the euro as it is not going to be fixed by fiscal union, it is certainly not going to be fixed by political union and the Germans are not going to continue to bailout Southern Europe indefinitely. The only way the problem is going to be resolved is to have fewer countries in the euro and at last it seems as though some European leaders are thinking the same.

However, Merkel and Sarkozy should shoulder much of the blame for the debacle that the eurozone finds itself in, as even after last week’s Rescue Package, the holes in it were very evident for all to see. The financial details of the plan were too complex and the €1 trillion euro’s pledged to increase Europe’s main rescue fund, the EFSF was nowhere near enough to withstand a run on Italy and Spain. Unfortunately the Greek tragedy that is being played out in real life should have been dealt with 2 years ago, when both Germany and France should have thrown vast amounts of money to save Greece and the euro, rather than trying to do it on the cheap and deliver a package which on the surface seemed to resolve the issues, but when you stripped away the layers fell way short, once again, of what was needed to put an end to the crisis.

The problem as I mentioned last week is now one of contagion. Italy now finds itself in a very precarious position as the Italian government is finding it increasingly difficult to fund their huge deficit. Bond yields are at 6.3% and widening all the time, despite the fact that the European Central Bank is buying vast amounts of Italian debt. So what is to be done – let Greece default and leave the euro? I think that this seems the only option left and even though a messy default of Greece would cause huge problems for the European economy and the European banking sector, the greater fear of contagion to Italy, Spain, Ireland and other eurozone countries could make the Credit Crunch of 2008 look like child’s play.

The euro has been a political project from the outset with Germany knowing full well that some of the countries should never have joined, let alone allowing other countries such as Greece to join later. Some leaders may well have felt this would end up where we are now and if it ultimately means one or several countries leave the euro then this week’s events would have changed the economic landscape of Europe forever.

The market, as you can imagine, have had another rollercoaster ride this week after the initial highs of last week’s deal, to the lows this week of events in both Athens and Cannes. In addition there came yesterdays surprise move by the new ECB President Mario Draghi to cut interest rates in the eurozone by 25 basis points to 1.25 percent as the worsening situation in the eurozone outweighed concerns over inflation. The euro weakened on the back of this news as it took many investors by surprise, but it bounced back by the end of the day’s trading after Mr Papandreou backed down on a referendum in Greece on the bailout plan. High yielding currencies such as the Aussie dollar and the South African Rand traded higher on the surprise rate cut by the ECB as it changed the outlook on interest rate differentials.

The Canadian dollar lost a bit of ground today after Canadian unemployment showed a surprise drop of 54,000, against an expected rise of 12,000. The drop in unemployment was a surprise and boosted the chances of a rate cut by the Bank of Canada in the future. As Sheryl King, Head of Canadian Economics at the Bank of America Merrill Lynch stated, “It is definitely suggesting the economy is slowing……….one or two more of these and there is a strong possibility the bank could start reducing interest rates.”

The greenback on the other hand has had a good week in the currency markets as fears over the eurozone have led many analysts to see more euro weakness in the months ahead as the runaway train that is the eurozone debt crisis seems to gain momentum. The dollar was given a further boost today after U.S. Non Farm payrolls showed an increase of some 80,000 jobs created in the month of October. Although this was below analysts’ expectations, it was enough to push the unemployment rate down to 9%; it’s lowest for six months.

So another week rolls on and still the problems in Europe persist and actually get worse by the day. Even if Greece’s Prime Minister manages to survive a vote of no confidence from the Greek Parliament in Athens later tonight, placates Merkel, Sarkozy and the other leaders who feel he has been a “traitor” to the cause this week and gets his bailout package, it still will not be enough to save Greece as it is only putting off the inevitable – a Greek default and exit from the euro. It is only a matter of when rather than if this will happen, but the reality exists that Italy could be next and if they were to leave the euro one feels that it could spell the beginning of the end for European Monetary Union.

Weekly Market Commentary – Week Ending 28^th October 2011

OVERVIEW

Leaders from the eurozone finally thrashed out a deal to try and contain the 2-year long debt crisis, by getting private banks to finally agree to take 50 percent losses on their Greek government bonds. At one stage it looked like the talks may fail yet again, but after 8 hours of intense negotiations with bankers, the International Monetary Fund, world leaders and central bankers they came to an agreement that will hopefully draw a line in the sand on the eurozone debt crisis and bring financial stability not only to the eurozone but the wider economic community.

The actual terms of the agreement will not be finalized until the end of November but in essence the deal means that the private sector has agreed to accept a 50 percent “haircut” in its bond investment to reduce Greece’s debt burden by 100 billion euro’s, reducing its debt to 120 percent of GDP by 2020. It currently stands at a whopping 160 percent to GDP.

In order to get the banks to accept such high losses on their Greek bonds, the eurozone will offer “credit enhancements” to the tune of 30 billion euro’s and other sweeteners to lessen the blow of the deal. It is hoped that the deal will be signed, sealed and delivered by the end of the year, so that a second financial aid package can be in place for Greece in early 2012.

Not only did they agree to try and reduce Greece’s woes, eurozone leaders also pledged to increase the European Financial Stability Facility from its current €440 billion to €1 trillion. Leaders are hoping that this will be enough to prevent the debt contagion spreading to Italy and Spain, but many still feel that the final bill will be closer to €2 trillion for things to return to some kind of normality in the eurozone.

CURRENCY MARKETS

The financial markets seized on the good news and immediately investors scurried to cover their short euro positions, which had the effect of pushing the euro to almost a 2-month high against the greenback. The dollar on the other hand lost ground against most of the majors as investors used the news as a reason to ditch the safe haven of the dollar for riskier based assets such as carry trades, commodities and equities.

Unlike the euro, sterling weakened on the news as investors still felt that the sluggish UK economy and growth prospects will remain, even if the eurozone does manage to improve its debt ratios over the next few months. This view seemed to be backed up by data out from the Confederation of British Industry which showed UK factory orders fell in October at their fastest rate in 12 months. Likewise in the U.S. a handful of US Federal Reserve members have recently said that more quantitative easing may be required in the future if the U.S. economy and high level of unemployment do not start to show signs of improvement.

However, data out today did give the U.S. economy a boost as Q3 GDP grew at its fastest rate for almost a year as consumers and businesses alike increased spending, which may well continue into the final quarter of the year giving the U.S. economy a well needed boost. U.S. GDP jumped from 1.3 percent for the period April-June, to 2.5 percent for Q3 and was welcome relief to investors who have been waiting a while for some good news to come out of the States.

Commodity driven currencies not only strengthened on the back of the eurozone debt crisis negotiations, but also on news overnight that the Reserve Bank of New Zealand left interest rates at 2.5% and hinted to a rate hike sometime in the near future. In Japan, the yen continued to weaken and hit near record lows against the dollar after the Bank of Japan decided to extend its asset purchase program by 5 trillion yen to some 20 trillion yen ($65.8 billion). As one Japanese trader put it, “This was very predictable and foreign investors may be disappointed that the BoJ did not deliver something else.”

CONCLUSION

So finally Eurozone leaders managed to agree on a roadmap to resolve the debt crisis that has been the main feature of my blogs over the past month. As one reader told asked me this week, “Is this the slowest moving wreck you have ever seen? At least the US acted decisively when it had its own financial crisis after the fall of Lehman’s”. I could not agree more, which is why I think and have always thought that the concept of a single currency and single economic policy in the eurozone is fundamentally flawed as there are too many differences between each country, both culturally and economically. Only yesterday we saw Italian MP’s through punches at each other when discussions overheated regarding the solution of its own debt problems. The problem is though, how would a country leave the euro in an orderly fashion without causing untold problems for the region?  One view written in a report by UBS published in September is it will never happen, as they said the eurozone is like Hotel California “You can check out anytime but you can never leave.”

Weekly Market Commentary – Week Ending 21/10/11

OVERVIEW

The financial markets were still being driven by the ongoing events surrounding the eurozone where they were hoping this Sunday’s meeting of leaders from the 17-nation eurozone would finally deliver a resolute rescue package to prevent a sovereign debt meltdown in their currency zone. Alas, France and Germany once again could not agree on how best to deal with the situation and as a result a second summit has been scheduled for next Wednesday to thrash out how best to tackle the issue of maximizing the European Financial Stability Fund and the reduction of Greece’s debt. The reason for the second summit is twofold, firstly Angela Merkel, Germany’s Chancellor will not have sufficient time before Sunday to gain support required from her own parliament to conclude the talks in Brussels. Secondly, Merkel disagrees with French President Nicolas Sarkozy that it is not in the eurozone’s interests to make wider use of the European Central Bank in leveraging the EFSF bailout fund. Sarkozy argues that this is the best solution in dealing with the crisis that started in Greece, spread to Ireland and now threatens to infect Portugal and Spain.

The ongoing squabbling amongst European leaders has continued to raise eyebrows from other World leaders and as a result, China have had to cancel a summit that was planned for next Tuesday with the EU about how the debt crisis is affecting Europe’s standing in the world. China’s Premier Wen Jiabao called European Council President, Herman Van Rompuy to tell him in no uncertain terms that European leaders need to take concrete action now to put an end to the crisis and stabilize both the euro and financial markets.

CURRENCY MARKETS

In spite of the above the euro has managed to remain fairly robust this week, despite the fact that any concrete decisions on the debt crisis in Europe will not be decided until next Wednesday. The lack of movement likely reflects investor’s unwillingness to commit to increased risk until the outcome of the summit is revealed. German Ifo data out this morning did not provide the boost the euro was hoping, after data showed that German business sentiment fell for a 4^th straight month, indicating Germany’s economy is starting to slow down in a region where it is looked upon to be the driver for European growth.

Sterling has had a tough week in the markets as it has not only had to deal with dovish minutes from the Bank of England, but also sky high inflation numbers for the UK economy. Annual inflation came out higher than forecast at 5.2 percent, adding to worries that the UK economy in set for a long period of high inflation and slow growth, effectively known as “stagflation”. However, there was some respite for sterling yesterday after better than expected retail sales data was posted for September, showing a rise of 0.6% and indicating that UK consumers are still spending even though prices continue to rise.

Across the pond from the UK, U.S. economic data this week has gone relatively unnoticed and had little impact on the greenback as all eyes have been firmly directed towards Europe and its sovereign debt crisis. Against the Canadian dollar the greenback has weakened after data out today showed Canadian annual inflation jumped to 3.2 percent from 3.1 percent in August. This strengthened the loonie as traders now see very little chance of an interest rate cut this year or next.

The difference between Canada’s inflation problems and the UK’s is that Canada’s central bank can increase interest rates to dampen down inflation as it has growth in her economy and consumers will still spend, whereas the UK has stagnant growth and hence pushing up interest rates in the UK to tackle inflation would have the opposite effect of tightening the purse strings of UK consumers making them less likely to spend.

CONCLUSION

So yet another week goes by and the never ending saga that is played out in the eurozone rambles on. A unified agreement must be thrashed out next Wednesday for the financial markets to take some confidence with them into the last quarter of 2011. The agreements that will need to be made are acknowledgement that Greece is bust, followed by strong provisions from European member states to prevent contagion from Greece spreading to other eurozone countries. On top of that it they will also need to agree upon a plan to recapitalize the banks that will be forced to take severe haircuts on the Greek debt they are holding and a commitment to ensure other EU members will not be allowed to fail. Let’s all hope that by the time I write my blog next Friday unity from eurozone members on how to deal with the crisis will have been achieved.