FX Briefing - IMF intervention: acceptable in the short term, but not a permanent solution
ïƒ˜Eurozone countries agree on combined EMU-IMF aid
plan for Greece
ïƒ˜Business climate data signal acceleration of
growth in eurozone
ïƒ˜Dollarâ€™s interest rate advantage against the euro
widens on higher yields in US
ïƒ˜US employment set to
rise significantly in March
intervention: acceptable in the short term, but not a permanent solution
The dollar has been firm this week. The upbeat equity market
could have supported the greenback: the Dow is now heading towards the 11000 mark,
and would thus return to pre-Lehman levels. But the main impetus came from Europe. The to-ing
and fro-ing in the eurozone on the issue of Greece spooked the markets and pushed EURUSD below 1.33
temporarily. The strong economic data from the eurozone had little effect, however.
The yen, which has little to do with Greece, has weakened practically simultaneously with the euro.
USD-JPY climbed over 92.60 â€“ its highest level since the beginning of January.
We suspect that the very low Japanese interest rates, the brighter outlook for
the global economy and persistent speculation on the appreciation of the Chinese
yuan are boosting capital outflows. But the current exchange rate movement
might also be connected to the end of the fiscal year in Japan.
Eurozone government leaders, who met on Thursday in Brussels, have finally agreed on a potential aid package (the
details of which are still to be finalized) for Greece. Doubtless at Germanyâ€™s insistence, the plan envisages a combination of financial
support from the IMF and eurozone member states on the basis of their respective
ECB capital key. The IMF would contribute a substantial amount, but the
majority of the financial aid would come from bilateral loans from Eurozone
Decision to give loans will be based on assessments by the
EU Commission and the ECB. Strict lending conditions will have to be adhered to
and there will be no preferential terms. The government leaders emphasised that
these measures were a last resort: Greece could only take advantage of the mechanism if it were
unable to obtain sufficient funding in capital markets. In this connection, the
government leaders stressed that they were convinced that the austerity
measures implemented by the Greek government would suffice. They also pointed
out that, as Greece had not requested financial aid, no decision had to be
With this plan, the eurozone countries should succeed in
easing the acute problem with Greece. Spreads between 10-year German and Greek government bonds
have actually narrowed to 305 basis points. EUR-USD has also rebounded from its
lows and is now just under 1.34.
In the present environment, the solution chosen is appropriate.
There is obviously a loophole in the EU treaty: the case of a country becoming
insolvent should theoretically never come about. But apparently such cases can
occur. It therefore makes sense to call on the International Monetary Fundâ€™s
expertise and resources to ensure the consolidation of public finances. In
addition, IMF participation is attractive from a political point of view, as
less tax revenues would be required for an eventual bail-out.
This should not be a permanent solution, however. The
eurozone needs tools to prevent excessive deficits and debts more effectively
and precautionary arrangements in case a crisis does happen to occur. The
crisis mechanism ought to function without the IMF, as the latter is
responsible for providing international liquidity in balance of payment crises,
not for budgetary crises. Furthermore, it is not quite in accordance with the
EU treaty, if countries obtain central bank loans indirectly via the
International Monetary Fund.
The strong economic data from the eurozone had very little
impact on the market, presumably partly because of all the squabbling about aid
for Greece. Almost all business confidence surveys in the euro area
are pointing significantly upwards, particularly the German Ifo business
climate index, which rose by almost 3 points to 98.1 in March. Business
expectations have been quite optimistic for some time, and now the current assessment
has brightened up significantly too: production increased and order book
assessment has improved markedly. After a subdued start to
the year in January and February, the economy now seems to
be gathering steam.
This is paving the way for a stronger euro. In the short
term, however, it could be difficult for the European currency to gain ground â€“
especially as things are looking good in the US too: interest rate spreads
between T-notes and the corresponding Bunds have widened noticeably during the course
of the week: by more than 10 basis points on 10-year bonds, for example.
Spreads on 2- year bonds widened too. The higher yields in the US reflect growing uncertainty about the high assessment
levels in the bond market in view of a central bank which is slowly but
steadily working towards reverting to normal monetary policy conditions.
Macroeconomic data also confirm this trend. At the end of
next week, the US labour market report for March will be published. Observers
are almost unanimously of the opinion that employment will have risen again
significantly for the first time, partly due to weather-related effects and
extensive public recruitment for the census. We ourselves are predicting an
increase of 200,000 jobs; some forecasts are much higher. Further figures
support this view: the ISM index has been showing robust expansion for months; consumer
confidence has been lagging behind a bit so far, but could now have picked up
Stephan Rieke +49 69 718-4114
Grabbe / Klaus NÃ¤fken
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