The Greece debt deal

The Greece debt deal

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 17th of December.

The official process of writing off Greek debt has begun and involves several measures that aim to bring down the debt-GDP ratio to 124 percent from the current 200 percent. Officials however recognise that the current set of measures will be inadequate to hit the target and hopes to initiate additional measures at a later time.

The established approach of European decision making needs to be inverted first. European leaders made the minimum concessions necessary at every critical juncture to avoid an impending disaster, but failed short of decisive actions all along.

One of the strategies could be extending the maturity of Greek debts greatly, i.e. restructuring interest rates at two percent and making all debts payable after 40 years. Instead of the current piecemeal approach, a substantial package should be the way forward.

The second element could be a little more innovative; linking the performance of the economy with the debt outstanding. If the economy performs well, the maturity of debts could be shortened or the interest rate could be raised. An immediate solution could be linking the interest rates/maturity to the debt-GDP ratio. The hypothesis of linking debt forgiveness to debt-GDP ratio has been debated widely and if implemented successfully, it could be replicated under similar situations in future.

The assumptions that led to the current forecasts are questionable. It’s unlikely that there will be a smooth transition of debt to GDP ratio to 124 percent by 2020 is far-fetched. Even if the target is achieved by some miracle, the argument that debt will be sustainable then is questionable.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2298
GBP/US$ – 1.6179
GBP/CHF – 1.4861
GBP/CAN$ – 1.5965
GBP/AUS$ – 1.5362
GBP/ZAR – 13.9426
GBP/JPY – 135.89
GBP/HKD – 12.5432
GBP/NZD – 1.9178
GBP/SEK – 10.7812

EUR: The single-currency gained ground on Friday, hitting a high of 1.3170 against the US dollar after data showed US inflation fell in November for the first time in six months. This was the greenback’s fifth consecutive down-session against the euro with the EUR/USD pair advancing to 1.3156 from 1.3076 on Thursday. The economic data-calendar is light on the ground today and euro may display some volatility if market reaction is exaggerated to any bit news on budget negotiations from the other side of the pond. The GBP/EUR pair trades around the 1.2310 level this morning.

USD: The US unit eased against major currencies on Friday as lower than estimated November inflation data tamed fears of rising prices as the Federal Reserve gets ready to launch its third round of quantitative easing next year. The ICE dollar index, a measure of the dollar’s strength against a basket of six currencies, fell to 79.542 from 79.924 on Thursday. We have a quiet day on data from the US today though investors will be keenly watching signs of progress over the so-called fiscal cliff, particularly after last week’s near-total stalemate. We have existing home sales and building permits data due this week along with durable goods orders data. Also we have UK CPI reading due this week along with Core Retail sales data on Thursday, an important indicator of consumer activity ahead of the Christmas. The GBP/USD pair sits on 1.6197 this morning.

Have a great day!

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