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 €5.5 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.

Report by Alistair
Cotton

Written by
Currencies Direct

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