- The euro has strengthened significantly over the past 24 hours as EU officials finalize a prescription for Greece. Here are the details:
1) bilateral loans from European governments for 3 years
2) up to €30bn lending by euro area members states for the first year, in addition to the IMF’s contribution (€12.5 to 15bn reportedly)
3) lending rates near 5% calculated as 3-month euribor plus 300bp spread with further 100bp for more than 3 years and plus 50bp for operational cost
4) IMF loans priced according to their formula (currently 3.25% for a loan of 10x quota)
The package is larger than the market had anticipated and the rate is much lower than market rates. ( http://www.kathylien.com/site/eurusd/terms-of-eu-support-for-greece )
On FT.com Markets rally on Greek aid resolution
- Greece’s borrowing costs fell sharply and its stock market rallied on Monday as investors welcomed details of a proposed €30bn rescue by eurozone nations.
Share prices in Athens rose 3.5 per cent, their biggest one-day gain since early January. Bank stocks jumped more than 6 per cent after heavy losses last week.
“The solid form given to the Greek aid package, whether they use it or not, has given the market a much-needed psychological boost,” said Mike Berg, strategist at 4Cast consultancy.
The euro also benefited. The currency enjoyed its best single-day gain since August last year, adding 1.43 per cent before easing to $1.3583, up 0.7 per cent by mid-afternoon in New York. Two-year Greek borrowing costs fell 0.78 percentage points to 6.11 per cent, having dropped as low as 5.42 per cent in early trade.
The Greek government is set on Tuesday to borrow €1.2bn in six and 12-month loans to repay existing debts. The sale is expected to go smoothly.
However, former International Monetary Fund officials said there was uncertainty over how the eurozone would work with the IMF, which would be involved in a rescue.
Morris Goldstein, a former deputy director of the fund’s research department, said the lines of responsibility in the emerging deal were unclear.
Mr Goldstein said both groups might want to take the lead should Greece ask for aid.
The fund, he said, would insist on playing a leading role in setting the conditions for lending. These were likely to involve tough fiscal targets, more transparency on public finance data and possibly some structural reform to hold down wages and reduce costly pension rights.
“This has the makings of a strange dog’s breakfast,” said Mr Goldstein. “If a regional grouping can set IMF conditionality, what is the point of the fund anyway? This could create a very dangerous precedent.”
The rescue package agreed by eurozone members at the weekend would set interest rates of about 5 per cent – higher than eurozone countries’ own borrowing costs, but lower than the levels available to Greece in the markets.
Analysts said the details of the rescue plan had left questions unanswered, including whether it implied that eurozone members were now liable for each others’ debts.
The ongoing struggles of the eurozone to reach a deal have also left a “sour taste” in investors’ mouths, said Simon Derrick, head of currency strategy at Bank of New York Mellon.
Bull on the Euro? Euro gains on Greek aid, but downtrend intact (Kathy featured again. :D )
- NEW YORK, April 12 (Reuters) - The euro advanced to its highest level against the U.S. dollar in nearly a month on Monday after euro zone finance ministers agreed on a financial aid package for Greece.
The finance ministers approved a 30 billion euro ($40.5 billion) rescue package of loans, which Greece could tap if needed. At least 10 billion euros are also expected from the International Monetary Fund.
The euro zone, however, pared gains as investors sought details about the plan. Analysts also said the bailout package was not a game-changer for the euro and many still expect the currency to head lower in the next few months.
"The package has the size and terms the market wanted to see and it came quicker than expected," said Jens Nordvig, senior currency strategist at Nomura Securities in New York.
"There is still procedural uncertainty about activation and disbursement, but the bottom line is that we now have something concrete for the first time in this saga, and that should be important for markets."
The massive financial safety net boosted investor appetite for riskier assets, lifting U.S. stocks and briefly helping the Australian dollar rise to its highest in five months, before it fell later in the session.
Investors, however, were still cautious, prompted in part by the need for clarification of details on how the aid mechanism could be activated.
Christoph Steegmans, a German government spokesman, said on Monday that euro zone leaders, not those of the full European Union, would need to meet to activate the aid package for debt-ridden Greece. Earlier, Steegmans had said such a decision would require a full meeting of EU leaders.
When asked by Reuters to clarify the point, he said a meeting "of government leaders from euro zone countries" would be needed.
EURO RALLY NOT "EARTH-SHATTERING"
The euro rose to $1.3691, its highest since mid-March, according to Reuters data, before trimming gains to $1.3581 in late afternoon, up 0.6 percent on the day. From trough to peak, the euro has climbed about 4 cents since last Thursday.
"That said, the euro/dollar rally has not been earth-shattering and that fits with the notion that there are medium-term asset allocation shifts at play, a negative for the euro," said Nordvig of Nomura Securities.
"I am pretty comfortable with (Nomura's) existing path for euro/dollar, which sees a moderate move lower in Q2 to $1.32, followed by a further slight decline in Q3 to $1.30."
Analysts also expect short-term unwinding of net euro short positions, which were reduced slightly after hitting record highs a few weeks ago. That could probably take the euro to $1.38-$1.40 in the short term.
The single euro zone currency is still down more than 5 percent against the dollar and 4.6 against the yen in 2010 to date, making it an underperformer among major currencies.
The high-yielding Australian dollar AUD= briefly rose as high as US$0.9382 on improved risk appetite in Asia before retreating to US$0.9285, down 0.5 percent.
The dollar rose 0.1 percent against the yen to 93.25 yen JPY=, with a possible revaluation in China's yuan currency in focus. Chinese President Hu Jintao visits Washington this week for a nuclear security summit and is expected to hold a one-on-one meeting with U.S. President Barack Obama on Monday.
Currency investors are also likely to focus on first-quarter U.S. corporate earnings, which unofficially starts with the release of Alcoa Inc. (AA.N) results on Monday.
"If earnings are healthy, stocks could extend their gains, which will help sustain risk appetite in the forex market. With the VIX index falling to the lowest level (since July 2007), equity investors are optimistic and not anticipating any major surprises," said Kathy Lien, director of FX research at GFT in New York.
However, not all are optimistic. Ask Stephen Roach.
- April 12 (Bloomberg) -- The aid package offered by European governments “just buys Greece time” as the country still faces a “massive fiscal adjustment,” Morgan Stanley Asia Ltd. Chairman Stephen S. Roach said.
“It may certainly reduce the possibility of default on a near-term basis,” Roach said today in a telephone interview with Bloomberg Radio from China. “But you have to ask yourself how the heck is Greece going to do the type of massive fiscal adjustment that they have supposedly agreed to in a short period of time to get these funds.”
Forced into action by a surge in Greek borrowing costs to an 11-year high, euro-region finance ministers said yesterday they would offer as much as 30 billion euros ($41 billion) in three-year loans in 2010 at around 5 percent. As much as 15 billion euros would also come from the International Monetary Fund.
“The economy is already in recession and they can only get deeper,” Roach said. “I think that will undermine the willingness of Greece to stay the course of this fiscal adjustment.” The aid deal “just buys time, that’s all it does,” he said.
The Greek government has yet to request a European lifeline, confident that this year’s planned budget cuts will stem speculation that it’s heading for the euro region’s first- ever default. ( source: http://www.businessweek.com/news/2010-04-12/greek-aid-package-just-buys-time-morgan-stanley-s-roach-says.html )
Just for the record: Greece needs to borrow around 11 billion euros by the end of May to refinance its debt. ( Read more: here )
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