Greek debt remains an open issue

Currencies Direct June 24th 2011 - 2 minute read

Positive news on the passing of further austerity measures in Greece met EU leaders meeting in Brussels yesterday evening. But the speed at which the Greek budget developed a gaping hole of EUR5.5 Billion should be as telling guide as to the spiral in which the Greek economy is stuck. Austerity measures aimed at reducing the Greek debt burden, reduces growth and the ability to service the debt, leading to more cuts etc etc. Leaders will no doubt be discussing how to structure an orderly restructuring of Greek debt, since any unordered default would immediately render all Greek banks insolvent and create massive uncertainty over other banks holding of Greek debt. More worryingly still, it will put the spotlight on Ireland, Portugal and Spain and increase the probability of their own default or restructuring. All of this uncertainty is feeding through to extreme Euro volatility. The single currency is up in early trading after some positive German data at 9am assessing business conditions, and given that Asian Stock markets gains overnight we can expect America to follow suit this afternoon and the USD to slacken slightly, dragging the Euro higher into the weekend.

We are awaiting the Bank of England Financial Stability report at 9.30 this morning, which should not cause too much movement unless the Bank starts mentioning Euro-zone bank contagion in the event of a credit event in sovereign debt. David Cameron announced that Britain will not be involved financially in any second bailout of Greece through the use of the ESFM as the bail out vehicle. EU President Herman van Rompuy said funds from the ESFM “would not be part of the package”. Sterling trades down against the Euro and broadly flat against the Dollar today. With no Sterling related data due until next week, it will be events from the Euro-zone and US that dictate Sterling over the coming days.

Given Chairman Bernanke’s pessimistic outlook on the US economy earlier in the week,  May’s durable goods figure this afternoon will would usually be important in moving the Dollar today. However, given Stock markets are likely to be up across the board today, expect the tide to be firmly pushing the USD lower against both Sterling and Euro. We may nip back above 1.60 in GBPUSD before pushing lower again next week.

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