Greece and IMF

It has been a wild afternoon in the markets. What looked like a risk-on scenario shifted to risk-off once the President of the European Council Jean Claude Juncker commented on what would happen if Greece didn’t receive its next tranche of aid.

For that to happen the IMF’s audit released next month will have to prove that Greece has not complied with the conditions of bailout number 1. Tough love? Too tough for the EU as Juncker said that the Europeans would have to step in and provide the IMF’s share in that scenario. However, he also rightly noted that this might be voted down by parliaments in Germany, Austria and Finland who are already hostile to bailouts.

Adding to the confusion was ECB member Gonzalo-Paramo who said that the Bank expects that the IMF will extend the next tranche of funds to Greece….

This caused a sell-off in risky assets and the dollar has regained its footing. The Aussie, euro and pound sold off while the yen and the Swissie strengthened. Interestingly, gold has fallen along with the rest of the commodity spectrum. Not much of a safe haven then? But the asset that investors can’t get enough of is the Swiss franc. It broke another record versus the euro today and is cracking new highs against sterling. This was boosted not only by sovereign fears in Europe but also by the IMF itself who said that the SNB should hike rates in the near –term (it next meets June 16) and it should not intervene in the currency unless there is excessive volatility. Reading between the lines the IMF are warning the Swiss to get inflation under control and don’t worry about the impact of a strong franc on inflation or exports.

So the markets are suffering from an abundance of information at the end of this European session and risk isn’t liking it. Added to that the mixed messages coming from the various EU authorities only add to market jitters. The one thing we do know is that deep down there is no way of preparing for a Greek default. There is no alternative to the IMF and the EU extending Greece its bailout funds, compliance with the conditions or not. The Greek debt crisis has taken a more ominous turn today. Whereas previously the market thought a default was a year or two in the future, the truth is it could happen on June 29th when the IMF will release its audit and make its decision on further funds for Athens.

Expect some back-tracking form the IMF/ reassurances from the EU in the coming days that this scenario won’t happen, but the market can smell the fear.

Source: Forex.com

26.05.2011