Sunday, 6 November 2011

Euro Declines as Berlusconi Pressured to Quit; Franc Slides

By Candice Zachariahs and Monami Yui

Nov. 7 (Bloomberg) — The euro fell as allies of Italian Prime Minister Silvio Berlusconi pressured him to quit before a key parliamentary vote tomorrow on the 2010 budget.

The 17-nation currency slid for a second day against the dollar and the yen amid an unraveling of Berlusconi’s majority in the lower house and a surge in Italy’s bond yields to euro- era records. The franc dropped after the Swiss National Bank signaled it’s ready to act if the currency’s strength threatens the economy. Losses in the euro were limited after Greek Prime Minister George Papandreou agreed to step down to allow the creation of a unity government to secure international financing.

“The market’s focus is shifting to Italy,” said Yunosuke Ikeda, an analyst of foreign-exchange research at Nomura Securities Co. “Yields on Italian bonds may continue to rise unless Berlusconi resigns. The euro is likely to inch lower amid the flow of rather bad news out of Europe.”

The euro weakened 0.1 percent to $1.3776 as of 12:48 p.m. in Tokyo from $1.3792 Nov. 4 in New York, when it completed a 2.5 percent weekly slide. It fell 0.3 percent to 107.60 yen. The dollar dropped 0.2 percent to 78.10 yen.

The franc fell 0.9 percent to 1.2304 per euro and declined 1 percent to 89.33 centimes versus the dollar.
Calls for Resignation

Two Berlusconi allies defected to the opposition last week, and a third quit yesterday. Six others called for Berlusconi to resign and seek a more broadly backed government in a letter to newspaper Corriere della Sera. More than a dozen more are ready to ditch the premier’s coalition, Repubblica daily reported yesterday, without citing anyone. Berlusconi said yesterday he was confident he still had a majority.

Yields on the nation’s 10-year bond surged to 6.37 percent on Nov. 4, approaching the 7 percent level that drove Greece, Ireland and Portugal to seek bailouts.

Italy, which is due to auction treasury bills this week, sells more than 200 billion euros ($275 billion) of bonds a year. Its 1.9 trillion-euro debt amounts to 120 percent of gross domestic product, and is more than the borrowing of Greece, Spain, Portugal and Ireland combined.

The franc weakened against all of its 16 major counterparts after SNB President Philipp Hildebrand said the central bank expects Switzerland’s currency “to depreciate further.”

“Should that not be the case, it could lead to deflationary developments and weigh heavily on the economy,” Hildebrand said to the NZZ am Sonntag newspaper in an interview conducted Nov. 2 and published yesterday. “We are ready to take further measures in case economic prospects and a deflationary development should require it.”

Franc Peg Speculation

The Swiss central bank on Sept. 6 imposed a ceiling of 1.20 francs versus the euro after the currency, sought by investors in times of financial turmoil, had appreciated more than 17 percent in the previous 12 months, threatening Swiss exports and boosting the risk of deflation.

“The talk is that he sees a balanced exchange rate at somewhere between 1.30 and 1.40” per euro, said Mike Burrowes, a currency strategist at Bank of New Zealand Ltd. in Wellington, referring to Hildebrand. “There may be some thinking in the market that they’ll look to shift the peg up.”

Greek Unity Government

Losses in the euro were limited after Greece’s Papandreou met with Antonis Samaras, the leader of the main opposition party, and “agreed to form a new government with the aim of leading the country to elections immediately after the implementation of European Council decisions on October 26,” according to an e-mailed statement from the office of President Karolos Papoulias in Athens. Papandreou has already said he won’t lead this new government, the statement said.