Risk Appetite Increases

After a week fraught with uncertainty – will Greece got their desperately needed money or won’t they? – the answer investors have been waiting for appears to be a firm maybe. Eurozone leaders and the other members of the Troika have decided that Greece is eligible to receive the next bailout tranche, provided however that they meet the previously agreed to conditions of the loan. Though not a done deal as the disbursement date is still a few weeks away, it is enough to give risk sentiment a solid lift, putting a halt – albeit likely only a temporary one – to what was a relatively unremarkable week for the Euro.

Until the payment release, it is expected that the various policymakers of the Troika will continue to bicker about the way forward as it relates to the reduction of Greece’s debt load and a possible extension of time to achieve mandated fiscal targets. The Greek government has agreed that their budget monitoring process would become more stringent and frequent, and should the fiscal targets be unmet then tax hikes or automatic spending cuts would kick in. Finally, the Greek government agreed that if they missed the target by more than 10% over a six month period without corrective action being taken, an administrator would be appointed by the Finance Minister to oversee spending activity.

Provided the discussions are completed by the end of the month, the various national parliaments will still have time to approve the additional financing. Earlier concerns raised by the German government over Greece’s repayment of the bailout loans process appear to have now been resolved; the Greek government has now agreed that the proceeds for the loan repayment would be credited to a specific purpose escrow account held at the ECB within ten days.

In the meantime, Greece’s government will still have to prove their worth in order to get the Troika’s endorsement and to do that they must show their continued commitment to those economic reforms which have already specifically been declared. If all goes according to plan, a final decision on the payment release will be made by the Troika on December 3rd and Greece could get the payment by December 5th.

With the odds growing better for Greece, the news whetted risk appetite sufficiently that even a downgrade of France’s sovereign credit rating couldn’t suppress. Earlier in the week, Moody’s announced that France would be downgraded to Aa1 from AAA, an eventuality which markets had priced in not long after Standard & Poor’s decision in January. As the second largest economy in the Eurozone after Germany, the health of the French economy is seen as vital to the region’s overall recovery and raises additional concerns that the economic malaise is further impacting the powerhouses. Germany and France are the two top contributors to the Eurozone’s emergency fund accounts (the ESM and the EFSF), and the need for their contribution is certain to grow once Spain’s government formally requests bailout assistance.

Currency analysts say that while the recent optimistic sentiment gave the EUR/USD pair a bit of a break in what was otherwise a relatively range-bound week, impetus still needs to be fairly substantial in order to see a sustainable break out above the 1.30 level. Having arisen several times before, the Greek bailout tranche issue isn’t a new one for market players, nor is the downgrade of sovereign debt or even the Spanish government’s reluctance to ask for financial help. Aside from some knee-jerk reaction and because those scenarios have all been priced in to varying degrees, more of the same for the Euro-Dollar pair is likely.