The Euro is slipping today as a risk-off tone threatens to cut into the single currency's strong gains from Monday. The market's focus is on several stories, including jitters over Slovakia's vote on the EFSF, comments from ECB Trichet, as well as some contradictory signals from euro-zone policymakers. Overall, the concern in markets of a large writedown on Greek debt as part of any grand solution is keeping markets on edge.

Trichet Sees Systemic Risk

Trichet added some words of warning to political leaders in his testimony to the European Parliament.

From Bloomberg: European Central Bank President Jean-Claude Trichet warned of threats to the financial system as the conflict among political leaders intensified over how to extricate Europe from the debt crisis.

The crisis has reached a systemic dimension, Trichet told European lawmakers in Brussels today. Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.

Heavy words, that weighed on the EUR.

Slovakia Vote Knocks Back Risk Sentiment

Slovakia, the last member of the Euro-zone that needs to ratify the EFSF changes from July 21st, is expected to vote on the plan today. The vote is an uncertain one considering one of the members of the coalition said it wont support the EFSF.

From Businessweek: Slovakia looked set to reject the European Financial Stability Facility after a ruling coalition member said it wouldn't participate in the vote, leaving the government short of an absolute majority. Smer, the largest opposition party has said it may back the enhancement of the EFSF if the government steps down.

The market's attention therefore is focused on this important vote, and so far has created a bearish tone for commodities, risk sentiment, and the Euro. It is also an example of how local politics and the need for unanimous decision-making can slow down and hamper emergency efforts from European leaders.

Greece Likely To Get its Next Tranche of Aid Troika Says

In positive news for the Euro-zone sovereign debt crisis, the EU, IMF and ECB - the troika - which has been reviewing Greece's books prior to approving the next tranche of aid for Greece, said that the troubled country is likely to receive that aid in early November.

From Reuters: The approval of the €8 billion ($10.92 billion) in aid quickly moves the discussion onto write-downs, or haircuts. Sources with direct knowledge of talks with European governments and the International Monetary Fund said these write-downs could range between 40% and 60% depending on the modality used.

The other question open is whether European governments and the ECB also will have to accept losses to provide Greece with debt relief. The discussion is on a haircut, how big it needs to be and whether sovereign creditors may be involved, said one senior official with direct knowledge of the situation.

While a write-down of 21% was agreed upon in the July 21st Summit, those figures look to be too little in light of the deterioration in financial markets and in the Greek situation in the subsequent two months. Now, talk is of a write-down between 40% and 60%. That type of write-down would have to go hand in hand with support efforts to stem any potential contagion to other sovereign and insulation of the European banking system via some type of bank recapitalization - which we heard about over the weekend, though we don't have details.

Nick Nasad
Chief Market Analyst