Greek opposition show support for austerity

The euro has had a fairly volatile morning. Firstly, sentiment towards the single currency took a bit of dive after the release of a statement by Eurozone Finance Ministers after their emergency meeting on Sunday evening about Greece.

The statement didn’t really tell us anything new. Basically it praised Greece’s efforts at fiscal consolidation so far, before saying that the release of the next tranche of bailout funds by mid-July depended on Greek compliance with fiscal conditions and the passing of ”key laws” by the Greek Parliament on fiscal strategy and privatization plans.

The statement also mentioned the EU’s “pursuit of voluntary private sector involvement” in the form of roll-overs of existing Greek debt at maturity, which would avoid a default situation. This suggests that there is some progress being made on the long-term solution to Greece’s financial problems and it is going some way to sooth markets and has helped avoid an outright collapse of the euro at the end of last week.

But finding workable long-term resolutions to the Greek crisis won’t be discussed until early July, the statement confirmed. More pressing is ensuring Greece receives its next tranche of bailout funds to pay its creditors next month. The final remark in the statement was a call to Greek politicians to support further austerity, thus clearly laying out the obstacle to receiving the next tranche of funds: a no vote to further austerity from Athens.

The euro dipped to below 1.4200 at one stage this morning, but has since regained its composure and has convincingly broken back above the 1.4240 - a key resistance zone. The market is cheered by two factors: 1, the EU authorities looking like they are uniting around a possible solution to Greece’s short and long term problems, thus boosting market confidence. The second positive came from a spokesperson for the Greek opposition who said that it wants tax reforms and will back austerity measures put forward by the Prime Minister.

This soothed markets since earlier reports suggested that the opposition would push for a re-negotiation of terms with the EU and the IMF that would have most certainly led Greece to a disorderly default over the coming weeks. The next Parliamentary vote on the austerity plan is due 28th June, and if Athens doesn’t vote yes then one can assume the worst case scenario – the markets will push Greece into a disorderly default.

We believe that pockets of support for risk and for the euro in particular will be short-lived until 1, the next round of bailout funds are in the bag and 2, a longer-term solution is agreed and the role of private sector investors in a further bailout is clarified.

The press conference scheduled for after today’s EU Finance Ministers’ meeting is due early this afternoon. Investors may keep on the side-lines until then.

Although the euro may have clawed back some gains this morning, other risky assets remain under pressure. Stocks haven’t sustained Friday’s gains. This is partly due to the on-going Greek crisis and also due to a technical hitch at Euronext stock exchange, which had to delay its opening to resolve the issue. This hasn’t supported risk appetite.

Since May the Eurostoxx index is down nearly 10 per cent, so any further dent to risk appetite could cause the pan-European index to fall 10 per cent, which would be a technical correction and could herald the start of a more prolonged downturn in equities.

So the next few days and weeks are critical for risk sentiment. Gold is fairly flat today as investors wait for the EU Fin Min press conference later. Although the dollar, yen and Swissie all had a storming start to the session, safe haven currencies have come off their highs.

There isn’t much in the way of economic data today. Eurozone labour costs for the first quarter jumped to 2.6 per cent from 1.5 per cent in Q4 2010. This may lend support to the single currency as it suggests that inflation pressures are starting to show second-round effects and supports further ECB rate rises.

This week watch out for the Fed meeting on Wednesday, which will signal the end of QE2. Although we don’t expect QE3, we will be watching Ben Bernanke’s press conference closely and expect him to re-affirm his commitment to keeping policy loose for some time yet.

Source: Forex.com

20.06.2011