Investors Remain Nervous Over Greece’s Debt Crisis
The US dollar was mixed against most major currencies in advance of Friday’s upcoming jobs report and continuing euro jitters. Investors see Greece’s high borrowing costs as evidence that the beleaguered nation’s debt troubles are far from over. Greece was able to raise money from bind sales but financial markets demanded higher interest rates for Greece’s debts despite last week’s agreement between the EU and the International Monetary Fund. The EU has agreed to provide two thirds of funding should Greece need it and the IMF has agreed to provide the other third. The Athens government has repeatedly said that it does not need outside financing and has implemented austerity including tax hikes and a cut in pensions. Investors are waiting to see if the EU IMF agreement can restore euro confidence and erase concerns about Greece’s massive debt crisis. The euro has fallen more than 6.5% so far this year and investors are starting to question the sustainability of the multi nation currency that combines economically disciplined countries in northern Europe with free spending southern European nations. In addition to Greece’s woes Portugal’s rating was downgraded by three major ratings agencies. Michael O’Sullivan of Credit Suisse stated, “The issue of country indebtedness is going to be with us all year and next year on a kind of revolving basis.”
Bond Issue Fails to Meet Expectations
Greece’s recent bond sale gave the troubled nation little respite due to less demand than previous bond issues. The 7 year, 5 billion euro ($6.72 billion USD) Greek bond issue was the first test of market confidence after last week’s announcement of an EU IMF rescue plan. The Greek bonds carried a coupon of 5.9% twice what Germany pays on 7 year bonds. Fitch ratings agency said in a statement, “The (euro zone) statement was positive for Greece’ credit profile by enhancing its near-term financing options and flexibility as well as reaffirming the support of euro area member states for economic and fiscal reform in Greece.” Fitch continues its negative outlook for Greece and referring to last week’s agreement and cited a “lack of clarity over the fiscal financing strategy”.
No Indications Greece Will Ask For Aid
The head of the International Monetary Fund has not had much to say since the agency was assigned a subordinate role in the Greek rescue plan. Managing Director Dominique Strauss-Kahn said that there are no immediate indications that Greece would need the agency’s help. Strauss-Kahn also said, “We will move and we will say something only when Greece asks us.”
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Euro Gains in Early Trading
The euro pulled back from a ten month low against the US dollar in advance of the EU summit where European leaders are expected to discuss aid for Greece. The euro gained after Luxembourg Prime Minister Jean- Claude Juncker said that aid for Greece will consist of a combination of IMF “instruments and bilateral loans” designed to aid Greece. Differences in the EU still exist over whether to offer EU aid to Greece and what role the IMF will play. Some experts believe that turning to the IMF could hurt the credibility of the euro zone and create the impression that the EU is incapable of dealing with its own internal problems. Matthew Strauss of RBC Capital Markets in Toronto stated, “The uncertainty is hurting the euro. Turning to the IMF could complicate the situation because IMF assistance comes with a number of strict conditions, both on the fiscal and monetary sides. Net-net, it’s negative for the euro if the euro zone cannot solve the problem on its own.”
Investors Hesitant
In early New York trading the euro gained 0.3% trading at $1.3350. Investors remain hesitant in advance of the EU summit. Niels Christensen of Nordea in Copenhagen said, “There have been some very rapid moves in the last 48 hours and everyone is a bit hesitant now. People want to get the EU meeting out of the way before trying to push euro/dollar lower again.” On Wednesday ratings agency Fitch downgraded Portugal’s sovereign debt rating reminding investors that Greece’s problems could spread to other Euro Zone nations.
DisagreementAmong EU Leaders
As head of Europe’s largest economy German Chancellor Angela Merkel is pushing for an IMF solution for Greece’s debt crisis. Some EU leaders disagree saying that the EU should handle its own problems. Spain’s Jose Luis Rodriguez Zapatero believes that an internal solution will lend credibility to the EU and its multi nation currency. Most observers believe that any solution to Greece’s problems will involve a combination of EU loans and IMF aid. Speaking to reporters Greek Prime Minister George Papandreou stated, “We will move ahead whatever decisions are taken. Greece is determined to deal with its own problems,” he said, adding that “we are on the right track.” The Athens government has implemented tax hikes and wage cuts in an attempt to reduce Greece’s deficit to 8.7% of GDP this year. Greece’s 2009 deficit amounted to 12.7% the highest in the euro’s history.
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No EU Solution in Sight
The euro continued its decline on Tuesday as investors remain concerned that no solution to Greece’s fiscal crisis will be found at the upcoming EU summit. The euro fell against most major currencies on Tuesday as investors speculate that EU leaders may allow the International Monetary Fund to bailout Greece. European Central Bank President Jean-Claude Trichet indicated he is opposed to the low interest loans which the Athens government has requested. Greece’s debt crisis has caused a political rift in the euro zone and most analysts are pessimistic that any solution will come out of Thursday’s EU summit. Omar Eisner of Travelex Global Business Payments said, “Continued bickering back and forth between EU officials is highlighting the lack of cohesion within the bloc. That is ultimately undermining demand for the single currency.” The euro fell 0.3% vs. the US dollar trading at $1.3521 in New York. The euro fell 0.2% against the yen and last traded at 122.02 yen.
Greece’s Economy to Shrink 2% in 2010
On Monday the Bank of Greece said in its 2009-2010 monetary policy report that the Greek economy may shrink 2% in 2010, twice as much as had been forecast. Greece’s budget deficit for 2009 could be as high as 12.9%, four times the EU limit of 3%. The report also said that banks will face “serious challenges” as the nation’s economy slumps and will need to diversify funding sources as the ECB cuts emergency financing. Many experts see a further decline for the euro. According to the BlueGold Capital Management LLP the euro may fall as low as $1.20. Stephen Gen of BlueGold in London stated, “This policy divergence is one of the central pillars of my view going forward. It is one more reason for investors to be cautious about the euro.” On Monday European Central Bank President Jean-Claude Trichet said that the ECB may reassess its collateral rules softening the central banks stance regarding Greece.
Pound Falls on Rate Speculation
The pound declined vs. the greenback after a report showed that UK inflation slowed more than had been forecast prompting speculation that the Bank of England will keep rates at historic lows. Chancellor of the Exchequer Alistair Darling will deliver his budget report on Wednesday as the UK government deals with a deficit that could reach 12.6 percent of gross domestic product this year. The pound fell 0.2% against the US dollar trading at $1.5076. The UK is struggling with a budget shortfall similar to Greece’s and a stalled recovery which has kept the pound under pressure. The pound could extend losses if retail sales fall short of predictions. The UK retail sales report is due March 25th.
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Euro Has Worst Week Since January
The euro had its worst week last week since January as investors remained concerned that no EU solution will be found for the Greece’s debt crisis. A report last Thursday said that the Athens government sees limited prospects for EU assistance causing concerns about the nation’s ability to service its massive debts. Greek Prime Minister George Papandreou has said that Greece may have to turn to the International Monetary Fund is no EU lending mechanism is established at next week’s EU summit. Many believe such a move would threaten the credibility of the euro. European Central Bank President Jean-Claude Trichet and many other EU officials have ruled out IMF aid to Greece but opposition to EU assistance is widespread in Germany and the Netherlands. Andrew Wilkinson of Interactive Brokers Group stated, “From the perspective of the investor, events continue to be frustratingly opaque. Repeated meetings result in no clear statement other than a commitment that now appears far less solid than before.”
Borrowing Costs High For Greece
Currently Greece is paying twice as much as other EU nations in borrowing costs making it difficult for Greece to refinance its massive debts. Prime Minister Papandreou stated, “Let everyone be certain, Greece will not default, we will not let it default. Greece has a strong government and courageous people. We are returning to the road of economic stability.” Papandreou has also called for regulation to curb speculation which he says have driven yield spreads on Greek government bonds over EU benchmarks. Papandreou said, “We are building alliances in and outside the EU. We are convincing our partners for changes to set limits to speculators. We are not asking anyone to pay our debts. We will do this by ourselves. We want to be able to implement all that we have announced and enacted calmly.”
German Opposition
German Finance Minister Wolfgang Schaeuble said that only the most ‘extreme circumstances’ could justify a bailout by EU members. Schaeuble told German newspaper Bild am Sonntag that currently no joint EU mechanism is in place for assistance to EU members. Schaeuble stated, “There is no joint instrument for EU help. So only in the most extreme case could bilaterally coordinated, voluntary help come into question. But Greece has said itself it does not need this.”The Athens government has warned that it may not be able to implement promised deficit cuts if borrowing costs remained high. Schaeuble said Greece has access to aid from the IMF. Investors will be watching the EU summit closely.
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Greece May Turn to IMF For Help
Global stocks fell on Thursday and the euro fell vs. the US dollar as concerns over Greece’s debt crisis persist. Dow Jones Newswire reported that an unnamed Greek official said that Greece is increasingly pessimistic about receiving aid from the European Union and may turn to the International Monetary Fund for help in solving the nation’s massive deficits. Greek Finance Minister George Papaconstantinou described the report as “ridiculous” and said that most options are still open. Ashraf Laidi of CMC Markets in London stated, “Three months have elapsed since the last credit downgrade of Greece and (there is) still no credible solution on how it will obtain 56 billion euros to meet its short-term debt obligations.” On Thursday Greek Prime Minister George Papandreou told the European Parliament that if Greece has to continue to borrow at high rates the recent budget cuts will not be sustainable. Papandreou also said that Greece will not default.
Germany Supports IMF Solution
Greece is counting on EU leaders to come up with some kind of mechanism to aid the indebted nation at the upcoming EU summit next week. Some EU countries, most notable Germany, are skittish about making any promises regarding aid to Greece. The chief financial spokesman for German Chancellor Angela Merkel’s party, the Christian Democratic Union, said that Greece should seek aid from the IMF. German lawmaker Michael Meister stated, “We have to think about who has the instruments to push for Greece to restore its capital-markets access. Nobody apart from the IMF has these instruments.” Although Greece would prefer an EU based solution the Athens government said it is keeping “all options open” as long as Greece is forced to borrow “at an unreasonably high interest rate.” Antje Praefcke of Commerzbank stated, “This just highlights the uncertainty surrounding the Greece issue. There seems to be no consensus in the euro zone, which is undermining confidence and that is what is weighing on the euro today.” A clear majority in the Dutch Parliament opposed EU aid to Greece and also thinks Greece should turn to the IMF for a solution to their debt problems.
Germany’s Hardball Stance
Some experts believe Germany will eventually soften its stance. Paul Hofheinz of the Lisbon Council, a Brussels research group, stated, “The Germans see the same thing that all of us see: that at the end of the day, they’re going to be part of the solution and it’s going to cost them something. When push comes to shove, I don’t think anyone doubts that the Germans will be part of this settlement. But why should they play easy?”
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