June Currency Update

Bailout or bust. The spectre of a default by Greece on its government debt loomed closer this week after a comment by Jean-Claude Juncker, chair of the Eurogroup of EU finance ministers. He told a conference that “The IMF can only be active when there is a refinancing guarantee for 12 months”. So far there is none. “The expectation of the IMF is that the Europeans would step in for the IMF and take upon themselves the IMF’s portion of the financing… That won’t work, because in certain parliaments – Germany, Finland and the Netherlands and others too – there is no preparedness to do so.” It seems that the IMF will provide a loan only if its repayment within 12 months is underwritten.

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Realistically, the only potential underwriters are EU governments. They are already paying the price at the ballot box for committing taxpayers’ money to earlier such rescues. Germany’s chancellor, for one, is not eager to further prejudice her own chances of re-election by throwing good money after bad. (The European Central Bank could in theory make the pledge but only at the cost of undermining the credibility of the euro.)

Greek prime minister George Papandreou claims his government is doing its best. It is making further cuts to public spending and embarking on a programme to raise money through the sale of state-owned assets including ports, airports, railways, the national lottery and shareholdings in utilities. But effectively it is selling the house to make the monthly credit card payment. Many analysts doubt the country will be able to demonstrate the progress that the EU, the IMF and the ECB are demanding before they stump up any more cash. Using the OECD meeting in Paris as a platform, Mr Papandreou stressed that “It is Greece’s responsibility to solve its crisis.” He ended his speech with an appeal to “Leave us alone. We know that we have problems, leave us alone to work.” The leaders of Germany, Finland and the Netherlands must be sorely tempted to do exactly that.

Investors’ disenchantment with the euro was compounded by a heavy hint from ECB President Jean-Claude Trichet that after no interest rate increase in May there is not likely to be one in June either. Almost since the beginning of the year they had been pinning their hopes to the prospect of a series of rate increases this year, chasing the euro higher. With that hope postponed they were more susceptible to the increasingly bad news from Greece. That included the warning by one of the ratings agencies that even a voluntary “reprofiling” of the nation’s debt would be treated as an event of default, trashing the value of all government debt.

It was after that hint on interest rates that the euro set off lower. It had started the month well enough, taking another two cents of the sterling/euro exchange rate. There followed a sharp rally for the pound that took it five cents higher in less than a week, then ten days of consolidation at the new level. A second rally in the last week and a half of May brought a fresh high for sterling, six cents off the month’s low and four cents up from its position a month earlier.

That is not to say that sterling was blameless. Purchasing managers’ indices showed a slowing pace of growth in every sector of the UK economy. Inflation accelerated to 4.5%, not pointing the way to higher interest rates but showing how Brits’ savings and spending power were eroding more quickly. Although retail sales put in a stronger than expected performance in April, investors dismissed the figure as a fluke, the result of three bank holidays and a royal wedding.

The outlook for sterling against the euro is obscured by the storm clouds over Athens. If the EU, the ECB and the IMF can pull the Greek bailout MkII from the fire there would almost certainly be a relief rally for the euro. If not, and especially if Greece really does default on its debt, the euro could be in for even more punishment.

What next?

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This entry was posted on Friday, May 27th, 2011 at 4:08 pm and is filed under French Property . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.


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