No End to the Euro Greek Tragedy

In 24-hours the market has gone from buying into the ‘yet signed’ Greek austerity Troika imposed measures, to a market, again, being slapped silly by another reactionary rating agency’s actions. The whip-lashed single currency has seen little reprieve as it trades close to last weeks support levels and ahead of tomorrows Euro finance ministers meeting. Investors are reluctant to make any bold moves after Moody’s cut the debt ratings of six European countries, including Italy, Spain and Portugal, and said it may strip France and the UK of their top triple A status.

The market had been expecting a degree of caution ahead of the Euro finance ministers meeting in Brussels tomorrow, where the second Greek bailout fund will be discussed; but with such tight stop losses, we have volatility. Implementation risk remains for Greece to avoid a hard default. It’s anticipated that Euro ministers will seek an explicit commitment from Greek officials before they can sign off on the ‘Memorandum of Understanding.’

There is fear that Greece will fail to enlist enough private investors in a voluntary debt restructuring to avoid a technical default. The country is likely to make its case for a voluntary debt SWAP after the meeting (the government is seeking to lower its debt burden by-EUR100b). Failing to achieve this goal, the government will have to make the write-down mandatory for hold-out investors. Requiring creditors to take a loss invokes the technical default scenario by the rating agencies. Whatever happens at these meetings, Greek officials can, once again, expect images of national discord to welcome them home!

Dealers are beginning to buy into the idea that the EUR faces diminished short term risks as the danger of funding hardships for Euro banks has been eased by the ECB’s LTRO operations. A handful of analysts are revising their one and three month forecasts for the currency higher, to 1.3 and 1.25 respectively. they believe that the Euro-zone crisis is less scary than three months ago. A combination of decent auctions in Italy and Spain this morning, mixed with decent ZEW numbers out of Germany and positive commentary from China’s Premier Wen (“China ready to do more to help solve EMU crisis”), has again dragged the EUR currency off last night lows. German economic expectations has improved far more than was predicted for this month, amid positive US data and progress in Greek negotiations with creditors. The reading rose to +5.4, the first positive reading in nine-months.

It’s not coordinated, but there is a ‘coincidental’ policy easing occurring from the top Cbanks. Ben is touting the lower-for-longer theme, King and company have provided a +GBP50b expansion in QE, Draghi’s ECB has the 3-year LTRO on offer, while Shirakawa is expanding the BoJ’s QE by another +10t yen, all earmarked for JGB’s. Japans surprise announcement last night certainly allows the dollar to reclaim its superior reserve currency status, for a while at least.

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Can the BoJ breath a little easier?

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