It’s Greece… again

Greece was dealt with back in October… well at least that was an official story until recently. The Greek issue came back as it was hard to close a deal with private bondholders. They were expected to swap their holdings for long-term bonds, erasing half of their face value on the way. However, despite some austerity measures implemented in Greece, the country seems unable to cut the deficit substantially and bondholders are pressed again to “voluntarily” accept a very low coupon on those long-term bonds (they are about to receive) which would take the cut to nearly 70% and some say even that might not be enough… Without the deal, Greece will not receive the next tranche of aid and will not be able to refinance bonds maturing in mid-March.

Obviously, it is not only a problem of “this” deal. It is a broader issue of debt-sustainability on the South – ranging from Greece, through Portugal (which is increasingly likely to require some debt relief as well), ending with Spain and Italy. Even though the northern economies might have escaped a recession and may start to recover (which we mentioned last week), the South may find any recovery elusive in a near future with uncompetitive industrial sectors and a combination of austerity and high fuel prices hitting domestic demand. That may force the North to transfer even more money to the South with a massive debt relief in Greece, a combination of a debt relief and lower funding cost for Portugal and lower funding cost for both Italy and Spain… and the North seems unprepared to contribute more.

Given the circumstances, the EURUSD is holding up well. The pair managed to defend a key level of 1,3075 yesterday (which was tested a few times recently, first as a resistance and now as a support) and there is a clear trend line on H4, supporting a current rally. Until it is broken, the bulls have an upper hand. Should the pair break it and move below 1,3075, the next key support is at 1,2880.

EURCHF – 1,20 draws near

Last few weeks were relatively good for risky assets, ranging from equities to emerging currencies to commodities. Normally, one would expect the euro to gain vs. the Swiss franc in such environment. Not only it did not happen – the euro actually continues to slide against the Swissy, despite alarming data from the Switzerland (see the latest KOF). There are some good reasons against a rally on the pair: a chance for the SNB to move the minimum accepted rate (now 1,20) looks very slim in a foreseeable future and some speculate that with Philipp Hildebrand gone the bank might lose determination to protect that level. While we agree with the first argument we really cannot see the SNB to let the pair tumble again and thus conclude that the hard bottom must be close.

Przemysław Kwiecień PhD, Chief Economist

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