Euro seesaws on Greek crisis
Scepticism about Greece is still persisting. Only last weekend, EU finance ministers and central bank governors had agreed on further details regarding the Greek aid package, but this week fresh doubts emerged as to whether the aid would actually be forthcoming, should it be necessary.
The forex markets were correspondingly volatile.
The euro erased some of the gains made at the beginning of the week: at about 1.35, EUR-USD ended the week at around the average level of the last two and a half months; during this period it was confined to a relatively narrow trading range of around 1.32 to 1.38 despite the Greek crisis.
USD-JPY was similarly volatile this week. The yen closed the week at 93 – the previous week’s level.
Last Sunday, the eurozone countries agreed on further details of the rescue plan: if necessary, Greece is to be granted loans of up to €45bn in the first year. The interest rate charged would be much lower than the market rate. Two thirds of this amount would be provided by eurozone member states according to their respective ECB capital key: a maximum of €8.4bn would come from Germany, €6.3bn from France, and €5.5bn from Italy.
Market participants do not see national parliaments readily approving such large loans. And they expect governments to face stiff political opposition. Thus after a sharp rebound at the beginning of the week, Greek bonds plummeted again: at the end of the week, yields were once again approaching the record levels seen before the agreement was reached.
This finally prompted the Greek government to request discussions with the EU Commission, the ECB and the IMF on a multi-year programme of economic policies. These talks are to be held next week. Activating the rescue package, which could involve financial support from the eurozone, is also likely to be on the agenda of the Ecofin Council meeting in Madrid, which starts today. However, it will take some time until it becomes clear how quickly the loans from the eurozone member states will materialise, if at all.
In the first instance, Greece will probably receive a standby loan from the IMF.
The Greek crisis will continue to occupy the European central bank for a good while yet, thus pushing the prospect of an exit from ultra-loose monetary policy and possible interest rate hikes into the even more distant future. It is also considered fairly certain, that there will be no quick exit from the expansionary policy on the other side of the Atlantic either. Capacity utilisation is still at a very low level, and the labour market is only gradually recovering.
This was confirmed again by this week’s US data. Capacity utilisation only increased slightly in March, and initial jobless claims rose unexpectedly. The core inflation rate fell again in March, which also fitted into the picture. There is no sign of inflatio
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