The US dollar fell, the euro bounced, the Aussie dollar rose, then fell and sharemarkets had a solid day in Australia and Asia at the latest sign the Greek finance/loan crisis has been defused.
For now, anyway. As to longer term, there’s another view at the end of this story.
Our market finished with a strong gain and closed above 5,000 for the first time since the Lehman Brothers failure in September, 2008.
Markets offshore did well with the Dow finally pushing past 11,000 points overnight. Gold and oil rose, bonds were easier and there seemed to be a great deal of relief at the news of the latest deal to sort out Greece’s debt woes.
The deal by eurozone finance ministers to approve a 30-billion-euro ($US40 billion) emergency aid mechanism for Greece overnight, with an extra 10 billion or so euros from the International Monetary Fund, will reassure markets that Greece will not implode, for the time being.
Greece hasn’t asked for the support package to be started, yet.
We will get a better view of market reaction overnight in European financial markets when Greece tries to raise 1.2 billion euros of three and six month money.
The new deal should cut the premium Greek sovereign two year debt traded at over equivalent German debt last week of 4% or more at times.
The deal will work, in the short term at least.
The markets wanted more detail on the previous agreement, especially numbers. That they got.
According to a statement issued by the finance ministers, it is a three year arrangement, and the 30 billion euros (and the IMF money), is for the first year alone!
That makes it perhaps the biggest multilateral financial rescue ever attempted and dwarfs aid packages to the likes of Mexico, Iceland, Hungary and other countries hit by the crunch and slump.
The cash is not needed right now (though if Greece attempts to use it more quickly than expected, that will trigger another mini-crisis). The interest rate is around 5%, not low as in IMF-only refinancings, but not around the market rates that Greece had been forced to pay in its last big fund raising two weeks ago.
Greece needs 53 billion euros, according to some estimates, for the rest of 2010. It needs to find 11 billion euros over the next month. It has around 300 billion euros of foreign debt, and an economy with an annual GDP of 240 billion euros. While valuable, the 40 billion from the eurozone and the IMF will place additional strains on the country’s already crook finances.
But for a realistic view of the deal here’s a comment from the Financial Times Associate Editor, Wolfgang Munchau.
"As I predicted last week, Greece will not default this year. But I am still sticking with my second prediction that Greece will eventually default.
"The numbers simply look too bad. The adjustment effort Greece is asked to make will be one of the largest in history. But unlike other countries that made a similar effort in the past, Greece cannot devalue; it faces a much more challenging global environment; it has a weak fiscal infrastructure; a low consensus in society in favour of deep reforms; and a fragile financial system.
"The agreed bail-out terms do not exactly offer much relief, except in the very short-term. It will become clear very soon that this loan agreement represents a net transfer of wealth from Athens to Berlin – and not the other way round."
And if Greece does default, the strains already evident inside the eurozone and in the euro will erupt once again. It’s only a matter of time.
Greece hasn’t been so much saved, as the life support system has been turned on and will now be seen to be kept on by the markets.
