By FXEmpire.com

Expectations for progress at today’s EU Summit have been reduced after rumors circulating this past weekend suggested that the EU might take dramatic actions. There were rumors that the EU might socialize European debts by issuing so-called ‘Euro-bonds’ backed jointly and severally by its member states, rumors that further and even greater rescue funds might be forthcoming, rumors that the EU might make money from its various lending funds available for the bailing out of the European banking sector, etc.

Notwithstanding whether any of these are good or bad ideas, there are important dates on the calendar that essentially serve as ‘decision nodes’ which will condition whether the EU states will want to commit further capital to bailouts – particularly bailouts of Greece. Greece does not currently have a governing coalition, but there is the possibility that a new government might form with a mandate from the Greek people to renegotiate the principal terms and conditions of the loans given to Greece by the ‘troika’ of the European Commission, IMF, and ECB.

The World Bank, the OECD and the IMF have had fairly harsh words about the EU and their actions or inactions. There is hope that the new French President Hollande might be able to put a match to their feet. It reminds us of the old story about Cesar sitting back and watching Rome burn.

That is a non-starter as far as the EC and ECB are concerned and would probably end the troika’s support of the Greek economy and financial system. With that in mind, there is certain logic behind the seeming inactivity of EU leaders: they are waiting to see what materializes in Greece.

With hope fading for significant action at today’s EU summit, risk aversion is rising amid fears that Europe and markets are unprepared for the downside risks posed by the crisis. Global growth forecasts continue be shift lower, with the World Bank decreasing its outlook for China, somewhat offset by official, growth-positive rhetoric. Risk aversion has climbed higher, equities are in negative territory, with 2% losses across Europe, bond yields are lower and the USD is stronger. EUR is down 0.25% after reaching a new low.

EUR remains historically strong, well above its average level since inception of 1.2145 and significantly stronger than the 2010 low of 1.1877. We expect EUR to trend lower; however do not think EUR will collapse. The combination of repatriation flows, value in Germany, the potential for the Fed to turn to QE3 and ongoing market belief that authorities will provide various levels of backstop support.

Yesterday, EUR weakened as headlines crossed that former Prime Minister Papademos was preparing Greece for an exit; however the headlines somewhat misrepresented the full context, which was far less inflammatory and suggested instead that an exit is unlikely to materialize but that it cannot be excluded as a possibility. Today the focus will be on the EU summit and the potential for broader inclusion of a growth compact within the fiscal compact, the potential for project bonds and the path ahead. Expectations are fairly muted that there will be a major development today. The next EU summit is June 28-29

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Originally posted here