Forex Analysis: Euro at Risk as Confidence in Greece Deal Unravels

Talking Points

Japanese Yen Sold as Asian Markets Rise on Euro FinMIn Summit, China Data
Euro, Risk Appetite Vulnerable as Markets’ Confidence in Greece Deal Unravels
Soft Set of US Economic Data May Amplify Downward Pressure on Sentiment

The Japanese Yen underperformed in overnight trade as Asian stocks advanced, sapping demand for the go-to safe haven currency. The MSI Asia Pacific regional benchmark index added 0.4 percent. Newswires attributed the chipper mood to the outcome of a meeting of Eurozone finance ministers where officials seemingly cobbled together a deal on near-term funding for Greece. Chinese Industrial Profits grew 0.5 percent in the year to October, marking the first increase since December 2011, which likely reinforced positive sentiment.

Eurozone officials said they aim to release a €34.4 billion funding tranche to Greece in mid-December and announced a series of new measures meant to bring 124 percent of GDP by 2020 and “substantially lower than 110 percent” by 2022:

Interest rates on bilateral loans will be cut 100bps. Loan maturities will be extended by 15 years and interest payments deferred by 10 years.
Eurozone governments will turn over all proceeds from Greek bond purchases distributed to them by the ECB back to Athens.
Guarantee fee costs paid by Greece on EFSF loans will be lowered by 10bps.

Critically, a careful reading of the statement following the summit reveals that rather than being triggered immediately, Euro area member states were “prepared to consider” them, apparently encouraged by Athens’ resolve to carry out reforms and given a positive outcome to a debt buy-back being considered by Greek officials “in the near future”.

The only detail given on said buy-back is that prices on Greek bonds that Athens will purchase from the market is to be no higher than the close of the November 23 trading day. It remains unclear how the government will finance these purchases since it presumably needs aid funding to pay down existing obligations.

IMF Managing Director Christine Lagarde said the fund would condition distribution of its share of Greek bailout cash on the results of the buy-back. The December aid tranche also seems to be linked to how the buy-back plays out. Finally, the €43.7 billion due to be paid out in three installments through the first quarter of next year will be linked to further assessment of Greece’s ability to meet key milestones (including tax reform).

On balance, the summit appears to have failed in achieving its most crucial objective: bolstering market confidence in the ability of Eurozone officials to produce coherent and credible response to the debt crisis. Greece itself is a fairly small part of the currency bloc, but policymakers’ response to the malaise there is seen as setting a precedent for how similar issues might be handled in larger counties like Spain. In offering the markets another murky scheme that sets the stage for renewed haggling down the road, the Eurozone has hardly earned investors’ trust.

Looking ahead, this is likely to open the door for renewed Euro weakness as the markets look past the headlines and digest the specifics. A more sober view is likewise stands to punish risk appetite at large as Eurozone sovereign risk stress resurfaces, weighing on sentiment-geared currencies and boost the safe-haven US Dollar. The push toward risk-aversion may be amplified as October’s US Durable Goods Orders report shows a 0.7 percent decline after a 9.8 percent increase in the prior month. November’s Richmond Fed manufacturing index is likewise seen ticking lower.

Asia Session: What Happened

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