Euro Falls as Europe Leaders Outline Bank Aid

By Candice Zachariahs and Monami Yui - Oct 24, 2011 6:07 AM GMT+0700

The euro declined, halting a four- day advance, as European leaders seeking to contain the Greece- fueled debt crisis outlined plans to aid banks and ruled out tapping the European Central Bank to boost the rescue fund.

The 17-nation currency also weakened as Reuters reported banks offered to write down 40 percent of their Greek debt while politicians are demanding a haircut of at least 50 percent, citing an unidentified banker. A complete blueprint won’t come together until the next summit on Oct. 26. The dollar traded 0.5 percent from a record low versus the yen on speculation the Federal Reserve may consider a third round of securities purchases to boost U.S. economic growth.

“You still have question marks and those question marks will remain for some time to come, particularly around the haircuts” on Greek debt for banks, said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “It’s logical still to run with a sell bias on the euro.”

The euro slipped 0.3 percent to $1.3853 as of 7:44 a.m. in Tokyo, from $1.3896 on Oct. 21 in New York, when it rose 0.8 percent. The 17-nation currency fell 0.4 percent to 105.59 yen. The dollar fetched 76.22 yen from 76.29 last week, when it fell to a post-World War II low of 75.82.

Crisis Summit

Europe’s 13th crisis-management summit in 21 months also explored how to strengthen the International Monetary Fund’s rescue role. The leaders excluded a forced restructuring of Greek debt, sticking with the tactic of enticing bondholders to accept losses to help restore the country’s finances.

“Work is going well on the banks, and on the fund and the possibilities of using the fund, the options are converging,” French President Nicolas Sarkozy told reporters during a break in the Brussels summit yesterday. “On the question of Greece, things are moving along. We’re not there yet.”

Bank capital needs -- estimated at 100 billion euros ($139 billion) by a person familiar with the deliberations -- will be met first by banks themselves, then by national governments, the European officials agreed. Only when national efforts fail can governments tap the main rescue fund, the 440 billion-euro European Financial Stability Facility, for cash to channel to banks.

Rescue Fund

Germany pushed through one of its main summit aims, defeating French efforts to bulk up the rescue fund by enabling it to borrow potentially limitless sums from the independent central bank. Policy makers are headed toward using the EFSF to guarantee government bond sales as a way to extend its reach. A second option is to set up an EFSF-insured fund that would seek outside investment in troubled bonds.

“You’re always going to be left questioning whether 440 billion euros is enough,” said Westpac’s Rennie. “It’s all very well talking about a special purpose vehicle raising money from outside investors; who are those investors going to be? And what size will that special purpose vehicle get to? It all remains to be seen.”

The dollar was weaker against the yen after Fed Vice Chairman Janet Yellen said Oct. 21 that a third round of large- scale securities purchases might become warranted to boost a U.S. economy challenged by unemployment and financial turmoil.

U.S. Growth

The U.S. economy probably expanded by 2.5 percent in the third quarter, according to the median forecast of analysts surveyed before the government releases its first estimate on Oct. 27. The Commerce Department reported a 1.3 percent annual pace of expansion in the second quarter and a 0.4 percent rate in the first three months of the year.

“There’s focus back towards a weak dollar,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney.

Fed officials are divided over whether and how to ease policy further after two decisions to lower borrowing costs with unconventional tools. Options include a third round of securities purchases and making the near-zero interest-rate pledge more specific. Dissenters including Philadelphia Fed Chief Charles Plosser say loosening policy harms the central bank’s credibility.

Demand for the dollar was also limited after Bank of America Corp.’s Merrill Lynch unit said the U.S. government’s credit rating probably will be lowered again this year as the so-called super committee fails to produce a credible plan to rein in budget deficits.

While the impact of a downgrade may not be as severe as the reaction in August when Standard & Poor’s cut the U.S.’s credit grade, such an action is among the reasons that the risks of a recession next year are increasing, Merrill Lynch economists said in a note to clients.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net

To contact the editors responsible for this story: Rocky Swift at rswift5@bloomberg.net