Euro plunges on doubts over Greece aid/Germany and France Said to Agree on Plan for Greece

Euro plunges on doubts over Greece aid
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: March 24 2010 08:42 | Last updated: March 24 2010 15:19
http://www.ft.com/cms/s/0/d228a2c2-371e-11df-b542-00144feabdc0.html


15:15 GMT: Worries that the eurozone debt crisis was spiralling out of control rattled markets on Wednesday, causing the euro to plunge as investors pared risky bets.

“There appears to be an accelerated and impending sense of doom about the status of the euro,” said Andrew Wilkinson, senior market analyst at Interactive Brokers.

The dollar rallied, commodities and stocks struggled, as traders became increasingly frustrated by the eurozone’s vacillation in the face of the Greek debt crisis and after Fitch downgraded Portugal’s sovereign debt, reminding investors of the breadth of fiscal woes.

The FTSE All-World equity index fell 0.7 per cent.

The euro came under heavy selling pressure as investors remained sceptical about whether a cast-iron guarantee to aid Greece had been agreed within the eurozone. Worries that any bail-out may require help from the International Monetary Fund has served to highlight the schisms within the bloc and left some analysts to question whether the eurozone project is sufficiently robust to solve its problems in-house.

Sentiment towards the euro was battered further by news that rating agency Fitch had cut Portugal’s credit rating from AA to AA-minus and with a negative outlook. The move, while not having too great an impact on Portuguese bonds themselves, served to remind investors that heavy indebtedness is a problem for many developed nations – and is particularly acute in the eurozone.

Not even stronger than expected German manufacturing and business sentiment reports could stop the single currency dropping to a new low versus the Swiss franc and the Australian dollar. It hit a fresh10-month trough against the US dollar of $1.3329 and was later trading off 1.1 per cent at $1.3348.

“The euro is increasingly vulnerable to the sub-$1.33 leg down as traders come to terms with the fact that three months have elapsed since the last credit downgrade of Greece and no credible solution on how it will obtain €56bn for its short term obligations,” said Ashraf Laidi, chief market strategist at CMC Markets.

“We expect euro/US dollar to extend losses towards $1.32 in later March, followed by a speedier decline to as low as $1.28 before end of April,” he added.

● Equity markets were hit by the wary mood. In New York, the S&P 500 index pulled back from 18-month highs, losing 0.4 per cent to 1,170 after some benign durable goods data and more downbeat housing numbers.

European bourses lost an early pop and the FTSE Eurofirst 300 fell 0.2 per cent. The FTSE 100 in London shed 0.1 per cent after earlier hitting a new 22-month peak. The UK Budget had little overall impact.

The FTSE Asia-Pacific index fell 0.2 per cent, with most major indices finishing well off early highs as they tracked the falling euro and rising dollar. Tokyo added 0.4 per cent, while Shanghai and Hong Kong were up just 0.1 per cent apiece.

● Sterling gained ground against the euro but was still below $1.50 to the dollar as traders digested details of the UK’s pre-election Budget. Gilts were softer, with the yield on 10-year notes up 4 basis points at 3.95 per cent.

● The centre of the eurozone storm was relatively calm. Greek bonds saw little action, with the yield on the 10-year note stable at 6.30 per cent, while Greek credit default swaps, a measure of likely default, fell 5 basis points to 328 basis points. The Athens stock market rose 0.8 per cent.

The yield on 10-year Portuguese debt rose 3 basis point to 4.34, while its CDS rose 2 basis points, to 136 basis points.

The yield on US 10-year notes jumped 8 basis points to 3.77 per cent as traders fretted about supply. The Treasury will auction $42bn of 5-year debt later. Bund yields added 2 basis points to 3.09 per cent as haven flows were trumped by the better than forecast economic news out of Europe.

● The stronger buck made life tough for dollar-denominated commodities, as did the fall in riskier bets. The Reuters-Jefferies CRB index, a commodities basket, fell 1 per cent, while oil fell 1.6 per cent to $80.63 a barrel following a report on Tuesday from the American Petroleum Institute that showed a jump in inventories.

Gold fell 0.9 per cent to $1,092, under pressure from the rampant dollar.




Germany and France Said to Agree on Plan for Greece
By STEPHEN CASTLE and MATTHEW SALTMARSH
Copyright by The Associated Press
Published: March 25, 2010
http://www.nytimes.com/2010/03/26/business/global/26drachma.html?hp


BRUSSELS — After months of fractious debate, a rescue package for Greece began to emerge on Thursday when France and Germany agreed to a plan combining cash from the International Monetary Fund with financing from the 16 countries that use the single currency.

The proposal, which was due to be discussed by other European leaders later on Thursday, would provide loans made at euro zone market rates and offered only with the agreement of all nations using the currency.

The deal involving France and Germany left unclear whether all countries in the euro zone — including financially struggling nations like Portugal — would take part. Paris and Berlin have said they expect that contributions will be based on the amount each country gives to the European Central Bank.

Nevertheless, the agreement represents a breakthrough because Germany has been resisting pressure to give details on how Greece could be rescued if necessary.

Greece has been desperate for a statement, backed by Germany, that explains how a default would be avoided — a declaration that it hopes will reduce the high interest rates Athens is being forced to pay as it faces deadlines this year on 54 billion euros ($72 billion) of debt.

News of the deal emerged after a meeting between Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France ahead of a two-day meeting of European Union leaders in Brussels that began Thursday.

No rescue is imminent, the document said, and the intervention would only be a last resort. It also called for the European Council — the body in which European Union leaders meet — to become a form of “economic government” of the bloc, and for much tighter controls on member states to avoid any repeat of the Greek crisis.

No figures were given in the one-and-a-half-page document, though one diplomat, speaking on condition of anonymity because of the sensitivity of the issue, said the total package could reach 22 billion euros.

The deal emerged as the European Central Bank said on Thursday that it would hold off tightening lending rules until 2011, a move that appeared to be designed to help Greek banks in particular.

The central bank president, Jean-Claude Trichet, told the European Parliament that the central bank would keep the credit ratings at an exceptionally low level for longer than planned on the collateral that its accepts from banks in return for short-term loans.

Previously, the central bank had said that it would raise the threshold for collateral at the end of 2010. It had been lowered as an extraordinary measure to help banks in the euro zone weather the global credit crisis.

The accord on Thursday reflected the determination of Germany, which is the biggest contributor to the European Union, to insist on tough conditions and strong safeguards.

French opposition to the involvement of the International Monetary Fund was overcome. The document states that although the fund would provide “substantial” loans, the majority would come from European governments.

To suit German demands, the accord says that loans to Greece would “not contain any subsidy element” and would be activated only after a rigorous assessment that all other borrowing options had been exhausted.

This would be undertaken by the European Central Bank but would then have to be approved by all 16 nations that use the euro. That gives all participating nations, including Germany, a veto.

The call for greater powers of “economic government” for leaders of the European Union was a concession for France, which has called for close integration on the economic policy.

In return, Germany won on a demand for a task force to be completed before the end of the year to identify “all options” on how European Union rules could be tightened to prevent any repetition of the Greek crisis, even if such moves meant amending the bloc’s governing treaty.

Mrs. Merkel has suggested that nations should be excluded from the euro zone if they break the rules, something that would mean a change of the treaty.

Meanwhile, Mr. Trichet’s decision lifts another cloud hanging over Athens. The prospect of tighter rules was especially worrisome for Greek banks because they hold a lot of Greek government bonds, which have seen their credit ratings slip in recent months because of the country’s deficit woes. Further downgrades could eventually mean that the bonds might no longer qualify as collateral for Greek banks seeking low-cost liquidity from the central bank.

Usually, Mr. Trichet would hold back such announcements for news conferences after the meeting of the central bank’s governing council. But with meetings scheduled for Thursday night to discuss a support package for Greece, the central bank may have chosen to send an early signal of support for Greece.

Loredana Federico and Davide Stroppa, economists at UniCredit Research in Milan, called the central bank’s announcement “quite a U-turn.” Until now, the central bank had been taking incremental steps to remove the generous liquidity measures it implemented at the start of the global financial crisis.

The bank’s decision should have “positive implications” not only for Greece, they said, but also for other countries under pressure along Europe’s periphery, like Portugal, which was downgraded on Wednesday by Fitch Ratings.

More details of the changes will be announced at the central bank’s next council meeting on April 8.

Greece’s long-term foreign currency rating is A2 from Moody’s and BBB+ from Standard & Poor’s. For its operations, the European Central Bank had until now said that the current minimum credit threshold of BBB- would revert back to A- at the end of 2010.

Now, for Greek government bonds to be excluded from European Central Bank operations, they would have to be downgraded five times by Moody’s and three times by Fitch and S.& P., analysts said.

“No doubt the worries about Greek government bonds remaining eligible at the E.C.B. beyond the end of 2010 have played a role in accelerating the decision to modify the framework, which in itself is not surprising,” Laurent Fransolet, an analyst at Barclays Capital in London, wrote in a note to clients.

Stephen Castle reported from Brussels and Matthew Saltmarsh from Paris.