Key for the Euro was a meeting between Angela Merkel of Germany and Nicolas Sarkozy of France in which they made strong commitment to find a new deal for Greece as soon as possible and to do whatever was necessary to protect and stabilize the euro.
From Bloomberg: “The euro gained versus the dollar for a second day as French President Nicolas Sarkozy said a “breakthrough” had been made on the Greek debt crisis, following a meeting with German Chancellor Angela Merkel.
The shared currency strengthened against all but one of its 16 major peers tracked by Bloomberg. A solution involving holders of Greek bonds in a new rescue package for the indebted nation has been found, Sarkozy told reporters in Berlin today at a joint press conference with Merkel. The chancellor said Germany would work with the European Central Bank on the compromise deal after earlier demanding bondholders pay a substantial share of any new bailout.”
Sarkozy and Merkel outlined some basic principles that sounded good to the market, as Germany seems to have relented from its stance on making private bondholders share in the cost of a Greek bailout via extension of maturities or other measures that are not voluntary.
From Retuers: ”The first principle is the voluntary basis, (which) I think is very important. The second principle is we don’t want a credit event or a default on payments. We want an agreement on this plan with the ECB.
The fourth principle is we want to go as quickly as possible. Since September is not as quickly as possible and we may have other concerns in August and we are in the second half of June, you see what I mean.”
“France and Germany want the new programme in place as soon as possible. There is no time to lose. “”
While Sarkozy and Merkel share the same positions, they did not fix a data for coming up with a 2nd bailout for Greece and were trying to show a unified stance, and one that conforms to the requests of the ECB.
That development helped to tighten the spreads on periphery Euro-zone debt, one of our key risk indicators for the sovereign debt situation. European stock markets were also higher, and while concerns still linger, the EUR/USD and other EUR crosses went about paring some of their losses from earlier in the week.
The fear is that the uncertainty around Greece pushes up the bond prices of other countries, creating financial contagion, which can undercut the strategy in place for a bigger country like Spain to get its finances in order.
Today’s session saw other higher yielders and commodity currencies gaining on the USD as well, as tentative risk appetite replaced heavy risk aversion, which was the theme mid-week.
In Greece, the uncertainty around a cabinet reshuffle and a vote of confidence in the Prime Minister will be watched next week, to see if there is enough political will to see through important austerity measures. A new finance minister was named today - Evangelos Venizelos.
Yesterday we had positive news in that the IMF said they would release the next tranche of aid to Greece even without a 2nd bailout in place for Greece which would give EU politicians more time to come up with some kind of solution.
From FTAdviser.com: “International lenders will be able to disburse €12bn to Greece without an agreement on the new €120bn bailout plan, pushing a default that could have come as early as next month back to September.
This is a U-turn for the IMF, which had insisted that it could not pay its portion of the disbursement without a full second bailout package agreed. The deal to disburse the funds should be completed on Sunday at a meeting of eurozone finance ministers in Luxembourg.
However, the EU said it would not clear the €12bn payment unless the Greek parliament passed a series of new austerity measures that had been negotiated with the Greek prime minister George Papandreou last month.”
That helped give the EUR support yesterday and the overnight comments from Merkel helped the EUR today. We’ll see if these latest developments are enough to help financial markets to switch from risk-off trading to “risk-on” as the immediate threat of a Greek default dissipates, but the concern in general remains.
Therefore traders should watch for any signs of weakness in the EUR after the weekend, and plan their traders with an eye to risk aversion creeping up quickly if things go astray inside Greece. While the immediate danger may have passed, the overall unease remains about how private bondholder participation will work out, so we will stay tuned to the next news during the weekend.
Chief Market Analyst
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