Most Believe Greece Will Seek Aid
Greece will decide sometime during the next few weeks whether to activate the loan mechanism agreed on by EU finance ministers last Sunday. On Monday the Athens government will begin talks with EU, ECB and IMF officials to clarify details of the agreement. Greek Prime Minister Papandreou told reporters, “We will have to make a decision about whether we activate this mechanism in the next few weeks.” Most investors believe Greece will seek outside aid as high borrowing costs are hampering Greek efforts to solve its fiscal crisis. The ambiguity surrounding the loan mechanism has caused investor concern and some are worried that the parliamentary approval required in some euro zone nations could prompt delays in the implementation of the loan mechanism. Some are worried that Germany, where political opposition to the aid package is widespread, could delay approval unnecessarily. Greek Finance Minister George Papaconstantinou indicated that it would take “one week, two weeks maximum” for the implementation of the loan mechanism. Papaconstantinou stated, “We are quite comfortable that once the framework is in place, meaning the program together with the financing elements, we will be able to move very fast.”
Loan Package Not a ‘Bailout’ Says Papandreou
In March the Athens government cut the pay of about 600,000 public sector workers raised taxes and cut pensions. The austerity moves prompted widespread unrest throughout Greece complete with strikes, protests and demonstrations. The European Commission said that Greece should not need to implement more austerity measures if the country taps the aid package. Greece’s central bank governor said the country should speed up deficit cuts by closing several “loss-making and spendthrift” government agencies. Bank of Greece Governor George Provopoulos told reporters, “This is how we will manage to positively please the markets by ourselves, by reducing the deficit by 5 percent (of GDP), instead of the 4 percent we have pledged for in the Stability and Growth Plan.”Prime Minister Papandreou said the loan package was not a bailout and but would give Greece time to solve its problems. Papandreou stated, “It gives us the room to maneuver to make the necessary changes to make our economy a viable one.”
Risk Aversion Pushes Dollar Higher
Concerns about how Greece will resolve its debt crisis has pressured the euro since late last year. The crisis has prompted a rise in risk aversion which has benefitted the US dollar and the yen. On Friday the euro fell 0.3% vs. the US dollar to $1.3533 and the euro fell 0.8% against the yen. Markets are closely watching this weekend’s EU conference in Madrid and will be monitoring Monday’s talks between Greece and EU/IMF officials.
Quick Forex Tip: Political conditions play a major role in global currency trading. Political instability can cause a currency to lose value. Recently political problems and deficit concerns in Greece caused the euro to fall in global currency trading centers. Market psychology although difficult to define can also affect market perceptions and can either help or pressure currencies.
