- No political deal in Athens
- Germany drafts contingency plans for Greek exit
- Nikkei up 0.23% Europe off -2.47%
- Oil at $94.41/bbl
- Gold at $1566/oz.
- AUD Home Loans (MAR) 0.3% vs. -1.8%
- NZD Retail Sales Ex Inflation (QoQ) (1Q) -2.5% vs. 0.3%
- EUR Euro-Zone Industrial Production s.a. (MoM) (MAR) -0.3% vs. 0.5%
Event Risk on Tap
- USD/JPY above 80 on dollar strength
- AUD/USD drops through parity as aversion accelerates
- GBP/USD drifts towards 1.6050
- EUR/USD gives up 1.2900 as concerns over Greece weigh
Risk FX currencies opened lower and continued to tumble at the start of week’s trade today as concerns over the prospect of Greek exit from the Eurozone mounted. Greek politicians were unable to come to terms over the weekend to form a workable coalition government with far left leader Alexis Tsiparas of the Syriza party pulling out of the talks over the critical issue of adherence to the bailout agreement. Mr. Tsiparas stated that "As long as they insist on the bailout, to a policy that the people have rejected, they cannot ensure social stability."
Meanwhile in Germany, the weekly Der Spiegel reported over the weekend that a task force in the German Finance Ministry has been assessing the consequences of a Greek euro exit for nearly a year. According to the magazine, the task force recommends that Greece should continue to receive money from the European rescue funds even after leaving the Eurozone but only in order to service the bonds held by the ECB rather than use for operational funds. The news will no doubt only inflame the debate allowing Mr. Tsiparas to argue that European rescue efforts are designed only to rescue investors rather than help Greek citizens to recover from the country’s economic depression.
On the other hand German finance Minister Wolfgang Schaeuble said Germany would be willing to support further growth measures for Greece. Der Spiegel reported that German Chancellor Angela Merkel is now willing to give in to the demand of the newly elected French President Francois Hollande to add a growth component to the EU fiscal compact. Merkel and Hollande are scheduled to meet Tuesday in Berlin to discuss policy issues further.
With Greek political situation remaining unresolved two issues are becoming clearer. Greece will most likely have to have another set of elections and the anti-bailout forces of Mr.Tsiparas may gain more power. Secondly the EU fiscal authorities will have to abandon their demands for draconian austerity measures in Greece and will have to seriously consider the prospect of debt forgiveness if they want the country to remain in the monetary union.
Of course Greece which only comprises 2% of the EU GDP has never been the real issue with respect to the euro. The true focus of the market is Spain, with traders worried that an exit by Greece could precipitate a domino effect and pull the rest of the Club Med economies with it. Today the Spanish/German spread widened out to euro era high of 477bps and the country was forced to auction off its 12-18 month T-bills at 2.985% versus 2.623% the period prior. Spain is now forced to borrow 12 month money at twice the rate that Germany pays for 10 year bonds.
With no eco data on the docket in North American trade currencies are likely to continue taking their cues from equities and developments in Athens. Having broken through the key 1.2900 and 1.0000 levels both Euro and Aussie remain depressed in early European trade and could test 1.2800 and .9900 receptively as the day proceeds if risk aversion flows accelerate.