Greece Needs $60 Billion in 2010

Greece has finally asked that the loan mechanism agreed on by EU finance ministers earlier in April be activated. Greece may need as much as 45 billion euros ($60 billion USD) this year. The request came as borrowing costs for the debt stricken nation reached unsustainable levels. The yield on Greece’s two year note hit 11% and spreads are at unprecedented levels. The euro rallied gaining a modest 0.1% vs. the US dollar trading at $1.3306 but many analysts believe the aid package will do little to solve Greece’s long term problems. Daragh Maher of Credit Agricole CIB stated, “It’s a positive development in the short term. In the longer term, it’s just a sticking plaster over the situation. The euro has not seen a sizeable bounce. It shows investors remain uncomfortable with being bullish on the euro.”  In a live broadcast Greek Prime Minister George Papandreou said, “It is a national and imperative need to officially ask our partners in the EU for the activation of the support mechanism we jointly created. The time that was not granted to us by the markets will be given to us by the support of the euro zone.” At this week’s G7 meeting Japanese Finance Minister Naoto Kan said that Europe asked the US and Japan for a show of support for Greece but did not request financial aid.

Trading Driven by Greek Concerns

Despite a rise in the German Ifo institute’s business morale index and a larger than expected increase in euro zone industrial new orders euro trading remains largely driven by Greek debt concerns. Ian Stannard of BNP Paribas stated, “It’s not economic fundamentals but the euro zone peripheries, especially Greece, that’s going to weigh on the market.” European Commission spokesman Amadeu Altafaj said that emergency loans to Greece will be processed as quickly as possible. Altafaj stated, “Everything is going to be done in such a way that the mechanism can be triggered as soon as (necessary) and as is necessary for Greece.” He said that interest rates on the loans would be calculated according to a formula worked out between EU finance ministers earlier this month. He also said that since the disbursement date was not known it was not possible to say exactly what the rates will be.

Austerity Measures Could Hamper Growth

European markets rallied briefly after the announcement as investors and analysts believe the loans are a short term solution to ongoing debt problems in the euro zone. Investors are also concerned that the imposition of further austerity measures could hamper growth and deepen Greece’s recession. Investors also worry that Greece’s problems could spread to other EU nations, most notably Spain and Portugal.

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.

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.

Japanese Growth Exceeds Estimates

The Aussie dollar gained on most major currencies after Japan’s economic growth exceeded predictions prompting demand for riskier assets. The Aussie also gained after Reserve Bank Governor Glenn Stevens said that the central bank will “likely” have to adjust policies to keep inflation within a target range of 2 to 3%. Sue Trinh of RBC Capital Markets in Hong Kong stated, “The better-than-expected headline for Japanese GDP seemed to put a floor under risky assets. Clearly, it all depends on headlines out of Greece but the market seems to be settling down and reduced volatility is typically quite favorable for risky assets.” The Aussie gained 0.2% on the Japanese yen trading at 80.02 yen and the Kiwi dollar traded at 62.92 yen. GDP in Japan, Australia’s second-largest trading partner after China, rose 4.6% in the fourth quarter, better than the 3.5% forecast by most economists.

Aussie Gains Limited by New Chinese Reserve Requirements

At present benchmark interest rates are 3.75% in Australia and 2.5% in New Zealand making both currencies attractive to investors seeking high yielding assets. Recently both currencies have been pressured by a rise in risk aversion prompted by concerns about the fiscal health of some EU member nations. Aussie gains were pared after the People’s Bank of China said that it will raise reserve requirement for banks by 0.5% on February 25th. China is Australia’s largest trading partner.

Euro Gains For First Time in Five Days

The beleaguered euro rose for the first time in five days as investors wagered that the currency’s losses due to Greece’s fiscal crisis were too rapid to be sustainable. Fiscal problems in Greece, Portugal and Spain have put enormous pressure on the euro since late last year. Greek Prime Minister George Papandreou said that Greece is ready to address the crisis and make the necessary reforms and predicted the crisis would end in the “very near future.” Omer Esiner of Travelex Global Business Payments stated, “There’s been a little moderation of concern about the debt crisis. Investors are still wary about the situation, but most of the bad news is reflected in the value of the euro. It’s come a long way down in a short period of time.” Prime Minister Papandreou told reporters in Moscow that “Greece now is indeed in a difficult economic situation but it’s not the end,” after talks with Russian leader Vladimir Putin who said, “I think, hope and believe that we’ll emerge from the situation in the very near future and emerge stronger than we are right now.”

World Economic Forum Participants Support Bernanke

On Thursday the US senate voted to reconfirm Ben Bernanke despite fierce opposition. Bernanke faced the stiffest opposition since the confirmation of Paul Volcker in 1083. At the World Economic Forum taking place in Davos Switzerland Bernanke has many supporters. John Mack the chairman of Morgan Stanley said of Bernanke; “Ben got us through—along with a team of others—we got through a big crisis… And I’m sure there are people that would say if he was really doing his job that wouldn’t have happened. You and I both know that’s bogus. He has been in that role for a short period of time so I don’t think we’d have panic but I do think it would hurt the markets — we saw the markets sell off about 5% last week but I think the markets are feeling somewhat better because there is support and it looks like he will be voted in.”

Former President Clinton Supports Bernanke Confirmation

Former US President Bill Clinton also expressed support for Bernanke. About Bernanke’s nomination by Obama Clinton said; I will say this: I think he is right to reappoint Mr. Bernanke, for two reasons. One is that I think since this crisis occurred in September of 2008, Bernanke’s decisions have been very good, they have kept the American economy going and given us a chance to heal. Secondly, he said something that is very important to say, that the crisis occurred because regulation in the past had been too lax.” Clinton also said that Bernanke deserved the nomination because of his guidance through the worst financial crisis since World War Two.

Tight Senate Vote

The Senate voted 70 to 30 to confirm the former Princeton professor and Bernanke faced the stiffest opposition since the legislative body started confirming Fed chairmen in 1978. Bernanke faces opposition from many Republicans. Senators who supported Bernanke cited the strategies Bernanke used to address the worst recession in decades. Senator Carl Levin, a Michigan Democrat stated; “Chairman Bernanke’s performance in addressing the economic crisis and his current efforts to significantly enhance financial regulation to help prevent future crises outweigh his past mistakes.”

Exit Strategy Biggest Challenge

Many believe Bernanke’s biggest challenge will be devising an exit strategy to dismantle the various emergency measures the Fed took to address the crisis. The Fed’s low interest rates are seen as dollar negative in currency markets and investors have speculated for months when the Fed will raise rates. Despite the speculation about rates the Fed said last Wednesday that it would keep rates “exceptionally low” for “an extended period.”