Posted on 10 April 2010
EU Finance Ministers to Clarify EU/IMF Agreement
Sunday European finance ministers will hold a teleconference to detail how the rescue mechanism for Greece will work. The Finance ministers will be joined by the European Central Bank and the European Commission. At the present time Greek leaders have not asked the EU to activate the rescue mechanism but consider Sunday’s teleconference important. Greek spokesman George Petalotis said, “Greece has not asked (for) the activation of the mechanism. “ He added” It is an important step to detail the terms of the mechanism.” Markets have viewed the EU/IMF agreement as opaque and short on details. Although Greece has not asked for aid and has said repeatedly that it prefers a market based solution the teleconference is meant to insure the safety net will be ready if needed. A spokesman for Eurogroup President Jean-Claude Juncker stated, “There will be a teleconference on Sunday on Greece in the usual Eurogroup composition. Greece has not asked for help, but you have to be ready if they do”.
High Borrowing Costs Hammer Greece
Markets have hammered Greek bonds and bank stocks during the past week driving the heavily indebted nation’s borrowing costs higher. High borrowing costs could easily push Greece to ask for aid. Greek Prime Minister George Papandreou said in a newspaper interview that the Athens government may be forced to ask for a bailout if markets remain skeptical. Papandreou told reporters, “The question remains whether this mechanism will convince markets just as a gun on the table. If it does not convince them, it is a mechanism that is there to be used.” Greek Finance Minister George Papaconstantinou told reporters that clarification about the details of the EU/IMF agreement is needed. Papaconstantinou said, “The aid mechanism is a very important safety net. We have repeatedly said that it was crucial to create and detail it, but we hope and believe that Greece will not use it.”
Greek T Bill Auction Tuesday
EU members have promised to implement a loan package to Greece should market based solutions fail. On Tuesday Greece will auction 1.2 billion Euros ($1.6 billion USD) of 6 and 12 month T Bills but EU officials would not comment on the timing of Sunday’s teleconference. On Friday Papaconstantinou told reporters, “Until now all (bond) issues have been oversubscribed, that shows that despite the turbulence in bond markets there is interest and trust from investors. Our target remains to have better rates and borrowing terms.” To add to Greece’s troubles Fitch ratings agency downgraded Greece’s rating to BBB- , just above ‘junk’ status.
Posted on 30 March 2010
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.”
Posted on 25 March 2010
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.
Posted on 18 March 2010
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?”
Posted on 16 March 2010
Fed to Leave Rates at Historic Lows
The US dollar fell against most major currencies after the Federal Reserve repeated their pledge to keep interest rates ‘exceptionally low’ for an ‘extended period.’ The Fed did say that emergency measures to support the troubled housing market will end this month as planned. The Fed also said that the US economy has “continued to strengthen” but that “housing starts have been flat at depressed levels” and “employers remain reluctant to add to payrolls.” Fed Chairman Ben Bernanke is trying to decide how long to hold interest rates down to generate a solid recovery. Diane Swonk of Mesirow Financial in Chicago stated, “The recovery continues and remains on track to be subpar, at best. Businesses are finally stepping up to the plate and spending their cash flow, but the housing market and prospects for a broader-based recovery remain dim.” A recent report by the Commerce Department showed that housing starts were down 5.9% in February and the Obama administration told congress that unemployment is likely to “remain elevated for an extended period.” Many are starting to believe the phrase ‘extended period’ is political speak for ‘we don’t really know. ‘Speaking about the ‘extended period’ language David Tien of Fischer Francis Trees & Watts said, “The ‘extended period’ language means about three to four meetings of no change. This supports emerging market and peripheral currencies.”
EU Will Aid Greece
The euro gained on the greenback and the yen after EU finance ministers devised strategies for loans to Greece which has been a drag on the euro. Greece’s Prime Minister George Papandreou’s government is attempting to close budget deficits which are four times the 3% that EU rules allow. An unnamed EU official said that any aid to Greece would probably come from EU governments pooling funds for direct loans to Greece.
Commodity Linked Currencies Gain
Rising risk sentiment pushed the Canadian dollar also known as the ‘loonie’ to a two year high vs. the US dollar. Rising oil and gold prices helped to push the Loonie, the S African Rand and the Aussie dollar higher in currency markets. Almost half of all Canadian exports are raw materials including substantial quantities of oil. Precious metals account for about one fourth of S Africa’s exports. Recent reports showing a rise in Chinese exports benefitted the Aussie dollar. Australia is one of China’s chief suppliers of raw materials. So far this year the loonie has gained 3.9% vs the US dollar. Many experts say the Fed’s statement prompted investors to seek higher yielding assets and currencies. Jack Spitz of National Bank of Canada stated, “The statement’s likely to put a bid to commodities and by extension commodity currencies, most notably the Canadian and Australian dollars. Ultimately, by continuing to maintain interest rates low it will continue to promote growth and what we get with that is seen through rising equities.”
