Greece’s third bailout

Greece’s third bailout

Good morning and welcome to today’s foreign exchange market commentary on Friday, the 16th of November.

Those worried over a possible ‘Grexit’ may take heart as EU leaders have reiterated their pledge to keep the Hellenic nation in the currency union. German Chancellor Angela Merkel has made it clear for some months she wouldn’t eject Greece out if she could possibly help. However, it is also clear that Germany and other Northern countries are unwilling to commit billions to keep Athens alive in its death bed. So the recent dilemma over releasing the next tranche of EUR 31.5 billion in aid money is understandable.

Greece was praised however, for making progress on its budget and initiating structural reforms November 12th meeting in Brussels. Eurozone also granted it two more years to meet its fiscal target, extending the 2014 deadline to 2016 for achieving a primary budgetary surplus of 4.5 percent of GDP.

The EZ finance ministers however could not agree on bringing down the mammoth debt burden and financing this extension. If a consensus is not reached on the next Nov 20 meeting by the finance ministers, the issue would be taken up in a European Summit meeting two day’s later.

Meanwhile, Athens had to refinance EUR 5 billion of T-bills falling due today and the ECB wouldn’t accept more than EUR 3.5 billion in T-bill collaterals under the current ceiling. This reduces incentives for Greek banks to buy the securities. But Olli Rehn, the EU commissioner for monetary and economic affairs, said Greek banks have more money than previously thought and rolling over the debt should not be a problem.

The damage to the country’s economy has been made public through a leaked assessment of the economy by the troika of the EC, the ECB and the IMF. Much of the damage has been caused by the uncertainty over Greece’s continuance in the currency union. Nonetheless, the authors of the report were apparently surprised by the depth of the crisis.

Greece’s Prime Minister Antonis Samaras announced the latest round of cuts, amounting to EUR 13.5 billion for 2013-14, will be the last. But the troika report says another round of cuts worth EUR 4 billion would be required in 2015-16. Additionally, extending the fiscal targets means Greece will need to borrow about EUR 33 billion. That translates to another bailout.

Even if an agreement is reached over the additional money, it’s not clear how sustainable will be country’s debt levels. An earlier private sector “haircut” was expected to bring down the country’s debt level to 120 percent of GDP by 2020. That surely will be missed by a wide margin. Sources from the IMF suggests the country’s debt-GDP ratio will be at 160 percent by 2020 while a European commission estimate puts it at a manageable 140 percent.

Either way, Greece’s debts need to be rescheduled, either by lowering interest rates or by extending maturities. The IMF however, advocates a more radical step: forgiveness of Greek debt. That could prove a political minefield for Merkel’s Germany and other creditor countries as it amounts to acknowledging that the money lent to Athens has been lost forever.


GBP/EURO – 1.2442
GBP/US$ – 1.5874
GBP/CHF – 1.4987
GBP/CAN$ – 1.5882
GBP/AUS$ – 1.5362
GBP/ZAR – 13.0862
GBP/JPY – 128.81
GBP/HKD – 12.3122
GBP/NZD – 1.9568
GBP/SEK – 10.7391

EUR: The euro edged up against the US dollar on Thursday despite the currency-union’s GDP shrinking by 0.1 percent in the third quarter. EZ is officially in a double-dip recession now. Individually, German and French GDP numbers came in slightly higher while Italian GDP reading fell short of expectations. The EUR/USD pair came close to breaking the 1.2800 level but failed and opens lower at 1.2760 this morning. European inflation came in at 2.5 percent y/y, in line with expectations. Sterling has gained against the EU unit overnight and the GBP/EUR pair opens at 1.2453.

USD: The Cable has remained fairly range-bound against the US unit despite UK October retail sales data printing below forecasts at -0.8 percent. The looming US fiscal cliff and strife in the Middle East is keeping the greenback fairly well supported. A raft of weak data didn’t help the USD’s cause either as weekly unemployment rate rose sharply due to Hurricane Sandy while the Federal Reserve of Philadelphia Manufacturing Index slipped in October, indicating contraction in manufacturing activity. Inflation however, met expectations with CPI for the quarter printing at 0.2 percent m/m. The GBP/USD pair opens at 1.5880 this morning.

Have a great weekend!


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