G10 Currencies
EUR-USD: The Eurozone heads of government once again put the pressure on: while on Monday the Ministers of Finance had still declared that they wanted to develop “the parameters of a clear new financing strategy” Greece until the beginning of July the work is now likely to be completed by that stage. Otherwise it was made clear once again during the summit of the EU heads of government that any aid payments depend on the decision of the Greek parliament. If the latter does not vote in favour of a new savings package there will be no payments from an old or new programme.
Initially the euro came under increasing pressure yesterday once it became clear that the Greek opposition would vote against the savings package. The news that an agreement had been reached with the EU and IMF inspectors on a five-year savings plan then brought some support. This plan will have to be passed by parliament first. Should it not be possible to put together a new aid package Greece would default as early as Mid-July. That makes it even more important to get the opposition on side. The heads of government have been trying to achieve this by promising payments from the EU cohesion fund. The latter is actually to provide support for poor regions within the EU. Now it is to support the Greek with EUR 1bn. thus meeting the demands of the opposition. The opposition had been pointing out once again that what was required were investments to revive the Greek economy rather than further savings measures.
It is this political game of pokers that is putting pressure on the euro at the moment. On the one hand the EU is bringing forward very clear cut requirements for Greece to fulfil and on the other hand even the Greek opposition is able to negotiate further concessions with its negative stance – as that is what the payments from the cohesion fund are. This reflects the dilemma of the EU heads of government of what to do if the Greek government really was to refuse meeting the requirements. Even Fed president Ben Bernanke has voiced a warning. He assumes that should the negotiations fail the European (and global) financial systems and the political unity of Europe would be under threat. The political unity of Europe is not in the best of shapes anyway, but the effects on the financial markets are difficult to gauge at present. The development of the spreads of Portuguese bonds against Bunds gives reason for concern though.
An aid package will not solve anything long term. Just to remind our readers: At the end of 2010 Greece had debts of 142.8% of GDP. At the end of this year these will have reached 157.7% and by the end of 2012 166.1% (EU Commission’s estimates). As a result the situation remains unsustainable long term. That is exactly what makes a voluntary involvement of private banks and insurance companies in the aid package difficult. All private investors know that in the end they will not get their money back. Even if the officials keep claiming the contrary: with the (probable) further aid payments those responsible are merely buying time until a haircut will become necessary.
Even if the FX markets are in the grips of the debt crisis, there are some heavyweights due for publication today. In June ifo business sentiment is likely to have been falling again. Should the result fall well below the consensus estimate of 113.4 points the euro is likely to come under further pressure as the solution of the Greek debt crisis would certainly not become any easier should the economic engine of Europe, Germany, weaken. Moreover US data might also put pressure on EUR-USD. We expect the order intake for durable goods to surprise on the upside.
CHF: The Swiss franc is on the up again. Yesterday EUR-CHF fell as far as 1.1847. Following the agreement between EU, IMF and Athens on the five-year savings plan the currency pair was able to recover again slightly but continues to trade below 1.20. Not least falling prices in USD-CHF have made it clear that the franc is the last real “safe haven” for investors. It remains to be seen how much longer the central bank will accept that – even if deflation is not an issue at present. Until the SNB issues any warnings the franc is likely to remain in demand due to rising uncertainty.
Emerging Market Currencies
RUB: Is a Greek-style debt crisis looming in Russia? According to Sergei Ulatov, the World Bank’s economist in Moscow, the country is in danger of ruining its national finances on a sustainable basis. Unless the state changes its spending patterns the situation would get out of control by 2030 at the latest. Last week Minister of Finance Alexei Kudrin had already demanded 4% spending cuts so as to stabilise public finances. The public spending patterns are likely to have been affected negatively in particular by the high oil price so far this year. Lower oil prices could easily get the finances out of balance.
CNY: The Financial Times published an opinion piece by Chinese Premier Wen Jiabao. Most notably he claims that China has succeeded in getting inflation under control. He points to various policies to cap price rises. He points to abundant supply of grain and an oversupply of main industrial products. We are extremely skeptical. China faces rising inflationary pressures stemming from a shrinking labour force and excessive liquidity as a consequence of outsized FX intervention. The implications of his comments however are slower PBoC rate hikes this year despite inflation.
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