The market has already been forewarned that there will be no political end to the Euro-zone crisis from today’s tete-a-tete between Merkel and Sarkozy. Even with German officials insisting that Eurobonds were not on the agenda, a reluctant Chancellor may have to accept that there is only one way to prevent the Euro collapse and that is with Eurobonds replacing sovereign bonds. This would require members to pool their Eurozone risk to reduce their refinancing costs. This is good for struggling members like Greece and Italy. However, the borrowing costs would also rise for the Germans and the Dutch, maybe costing them their triple-A rating.

Issuing Eurobonds, it is believed would add EUR47b to the Germans bill, a snip if you look at the alternative. Capital markets successfully attacking Italy, then France, the Germans losing their coveted AAA credit rating. This in turn could trigger a global depression and a bill for the Germans three times the cost of issuing Eurobonds. As a politician, Merkel must keep her options open!

This morning, the EUR remains supported by a combination of the short selling ban and growing concerns about outflows from a ‘be-leagued dollar’. The divergence in growth between the core and periphery countries is narrowing as noted from the disappointing German GDP data. Growth in Europe’s largest economy slowed sharply in the second quarter (+0.1%), leaving it below pre-crisis levels and calling into question Trichet’s decision to tighten twice this year. Combined with the French data last week, this is more than just a soft patch for the ‘invincible core’. Perhaps policy makers may have to begin their discussions on reversing this years hikes over the coming months?

The US$ is stronger in the O/N trading session. Currently, it is higher against 12 of the 16 most actively traded currencies in a ‘whippy’ session.

Roundup of the choices facing European politicians. Germany will just have to “suck it up” & go for the eurobond option as there is just too much at stake. No wonder gold just keeps on rising!