The euro gained against the pound for the fourth straight day in a row as the markets reacted quietly to the announcement that the long awaited €130 billion bail-out of Greece has been agreed after seven months of negotiations.
This improved risk appetite, lessening demand for the safe haven currencies allowing the pound to reach a high point against the US dollar since November 2011. Conversely, appetite for the risk based currencies, the Canadian dollar, Australian dollar and South African Rand also improved, albeit in a subdued fashion.
To recap, late on Monday night the so-called Eurogroup finally approved a deal that will provide a second €130 billion bailout to Greece. The agreement was reached after Athens earmarked the final €325 million in debt reduction required by the so called troika, the European Central bank (ECB), European Union (EU) and International Monetary Fund (IMF).
The Eurogroup opted for accepting a debt reduction to 120.5% of GDP by 2012, compared to the current 160% debt level. The deal also includes a private sector “voluntary” haircut of 53.5% which should save the Greek government approximately €107 billion in payments.
A supposedly confidential report prepared by the troika but leaked to the media summed up the situation as that the debt reduction targets are best wishes at most given the worsening state of the Greek economy. The Financial Times obtained a copy of the report and concludes that “even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole.” The most “pessimistic” scenario suggests that at least €245 billion would be needed.
In any case, the above report suggests that Athens may need even more support and is quite clear that, “given the risks, the Greek programme may thus remain accident-prone, with questions about sustainability hanging over it.”
“We have reached a far reaching agreement on Greece’s new programme and private sector involvement [PSI] that would lead to a significant debt reduction for Greece … to secure Greece’s future in the euro area,” stated Eurogroup President Jean-Claude Juncker at a post-meeting news conference (emphasis on the word “would”).
Of all the steps involved in making the €130 billion package a done deal, the most relevant is undoubtedly the acceptance of the “voluntary” haircut by the Greece’s private bondholders. The Eurogroup statement leaves no room for doubt: “a successful PSI operation is a necessary condition.”
The troika seem all too aware of past failures by Greece in complying with its side of the bargain and so plans to keep Athens on a short leash with supervisory task force that will have “an enhanced and permanent presence on the ground in Greece.”
They are also expecting a new Greek legal framework that will ensure “priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible.”
The Eurogroup statement concludes in the following manner:
“The official sector will decide on the precise amount of financial assistance to be provided in the context of the second Greek program in early March, once the results of PSI are known and the prior actions have been implemented. “We reiterate our commitment to provide adequate support to Greece during the life of the program and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme.”
Analysts at Barclays Capital were quick to point out that “it’s hard to envisage Greece returning to the financial markets before 2015.”
The investment bank also points out that the “main near-term risk we see is the potential for early elections (possibly in April)”. These analysts note that local polls show the coalition government parties losing ground while other parties that have never expressed support for the program are gaining in popularity.
Away from the euro zone, the Office for National Statistics (ONS) in the UK reported that the UK public sector´s current budget was in surplus by £14.7 billion in January, a full £2.7 billion higher than in January 2011, when there was a surplus of £12 billion and the highest monthly surplus in four years.
