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FX Briefing - Greece requests aid

FX Briefing 23 April 2010


Greek deficit for 2009 even higher than previously announced

Papandreou asks for rescue plan to be activated

FOMC unlikely to signal turnaround in interest rate policy


Greece requests aid

The Greek debt crisis and fears of increasing sovereign debt problems in other eurozone countries weighed on the euro again this week. EURUSD in particular slipped temporarily to 1.32, the lower end of the trading range of the last two and a half months. At the end of the week, however, after surprisingly upbeat economic data, and the announcement that the Greek government had officially requested aid, EUR-USD is around 1.33 again, still about 1.7% below last week’s level.


Eurostat has revised Greece’s budget deficit for 2009 from 12.7% to at least 13.6% of GDP. Moreover, Moody’s has downgraded Greece’s rating from A2 to A3. The even greater budget gap makes Greece’s stability programme, which is aiming to cut the deficit to 8.5% this year, appear even more ambitious. Implementing additional austerity measures would probably prove difficult: the measures unveiled so far have already prompted strike action. Furthermore, an even tighter fiscal policy could exacerbate the recession, which would not help to cut the deficit.


Greece’s dilemma has been deepening because of the surge in interest rates. Prices of bonds with shorter maturities plummeted dramatically this week. This reflects investors’ fears of an impending default or debt restructuring, even though the Greek finance minister George Papaconstantinou has shrugged off this possibility as being absurd. On Thursday, yields on 2-year bonds were over 10%, compared with 6.75% at the end of last week. 10-year yields jumped to 8.8% at times; thus spreads between 10-year Greek bonds and the equivalent German Bunds hit a new record of over 560 basis points. There is growing concern about contagion from Greece spreading to other eurozone countries: yield spreads between 10- year German and Portuguese government bonds, for example, climbed to a 13-month high.


Due to the sharp increase in the cost of financing on financial markets, the Greek prime minister George Papandreou officially requested aid from European governments and the International Monetary Fund (IMF) at midday on Friday. There is no time to be lost: Greece must find €11bn for maturing bonds by the middle of May.


The fact that Greece is now asking for the rescue plan to be activated is allaying fears of the debt crisis spreading to other eurozone countries and the monetary union breaking up, and is thus easing pressure on the euro. Before the rescue plan takes effect, however, governments of the member states must decide on bilateral loans. The French government has already drawn up a draft bill and earmarked €3.9bn, over 60% of France’s maximum contribution. If all member states provided about 60% of their respective maximum contributions, the total for the whole of the eurozone would be about €18.5bn. Together with the IMF loan, which the German minister of economics Rainer Brüderle estimates at €12bn, this would more or less cover the amount needed by Greece for 2010. However, it is still unclear whether this will in fact suffice. The rescue plan agreed at the end of March envisages bilateral loans of up to €30bn for this year and additional IMF loans of €15bn. The extent of potential financial aid necessary in the following years is not yet known.


In Germany, the legal procedure for bilateral loans has not yet been agreed. But the government will now hardly be able to postpone voting on the unpopular aid until after the election in the state of North Rhine Westphalia on 9 May. According to finance minister Wolfgang Schäuble, voluntary aid would conform with the Constitution, as the no-bailout clause in the Lisbon Treaty only prohibits member states from being liable for the commitment of other states. He said it was in Germany’s interests to stop the Greek debt crisis from escalating.


If loans, on which interest rates of about 5% would be charged, were not granted, Greece would probably become insolvent. This is not an option: if its debts were restructured, German credit institutions, which hold Greek government bonds to the tune of around €40bn in their portfolios, would have to take massive write-downs. This would cause capital base constraints, which would tighten lending further, and the banking crisis could flare up again.


This would jeopardize the German recovery, which just seems to be gathering pace in the second quarter. This week, for instance, the ZEW expectations rose by 8.5 points, and are now almost twice as high as their historical average. The Ifo business climate leapt from 98.2 to 101.6, mainly because current assessment had risen sharply. Expectations continued to improve too and are nearing their all-time high. Other climate indicators in the euro area were also quite upbeat. Nevertheless, according to the latest IMF World Economic Outlook, disparity between the US and the eurozone is widening: for the eurozone, the IMF is still predicting growth of 1% in 2010, and it has reduced its forecast for 2011 marginally to 1.5%. However, the US forecast for 2010 has been lifted by 0.4 points to 3.1% and for 2011 by 0.2 points to 2.6%.


Despite the brighter US economic outlook, the FOMC is not likely to signal that it will abandon its zero interest rate policy in the foreseeable future. In the minutes of the last meeting, some committee members had already warned against raising interest rates prematurely, particularly because of the risk that core inflation could drop more sharply than was desired. Therefore, the phrase “extraordinarily low rates for an extended period” is likely to be maintained.


Nevertheless, the dollar could remain well supported next week, and not just because of the ongoing problems in the eurozone: US GDP data for Q1 will show that this time the main driver of growth in the US was not inventories but private consumption.

Peter Meister +49 69 718-2600


Economics Department

+49 69 718-3642

[email protected]

Foreign Exchange Trading

[email protected]

Jörg Isselmann

+49 69 718-2695

Matthias Grabbe / Klaus Näfken

+49 69 718-2688


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