By: Mike Campbell
The fate of the Euro seems to be inextricably linked to market perceptions of the Greek government’s ability to meet its debt obligations. Jitters about the prospect of a Greek default on servicing their €300 billion debt send the Euro lower against the other major currencies whereas Eurozone promises of support paper over the cracks and send it higher. Right at the moment, the see-saw is rising. The Eurozone nations have agreed to beef-up the safety net that was provided for Greece should it not be able to secure funding in the money markets. The original fund put in place €22 billion that Greece could call on, if required. It seems that market sentiment was not fully convinced of the sincerity of the support for Greece (putting downwards pressure on the Euro) and a revised plan has now been agreed that (it is hoped) will quell these fears. The new plan foresees the provision of up to €30 billion in the first year of a three year package. The news was enough to see the Euro hit an intra day gains of 2 US cents and 0.75p against the Dollar and Sterling, respectively. The move also sharply reduced the yield on Greek 3-year bonds which fell from 7% to 6.1%, indicating renewed confidence in Greece’s ability to meet its obligations. Germany can borrow money on the open market at an interest rate of 3% whereas the Greeks are having to pay twice as much (this, of course, means that it costs them considerably more to service their debt). One wonders just what it would take before the markets appreciate that Greece will not default on its debts. Greece has already approved wide-ranging austerity measures to make inroads into cutting its debt burden.