Traders predict rise in euro as Greece secures €45bn aid pledge
TRADERS gave a broad welcome yesterday to the creation of a €45bn rescue package for Greece; a move that could herald the biggest multi-lateral bailout in history. Currency traders predicted the euro will now begin rising against sterling and the dollar in the weeks and months ahead.
The deal pushed down Greece's borrowing costs while investors bought the debt-ridden country's stocks and bonds as fears of a near-term default dissipated. The euro advanced 1.4pc against the dollar, its biggest one-day rise since September, and rose against all the other major currencies.
Despite the rise in share prices and fall in borrowing costs, unanswered questions remained over whether Greece would have to use the bailout fund, how it would be activated, and how the weakest of the single European currency's 16 members would cope with its €300bn debt mountain in the longer term.
"It's almost a market that's in disbelief that we've seemingly got a solution to this problem," said Sean Maloney, a rate strategist at Nomura.
Still, there were fresh signs yesterday that the deal might not be as water tight as first hoped. The euro slipped briefly when a German government spokesman raised a potential hitch by saying European leaders would have to agree at a special summit to activate the aid mechanism, in which Germany would be the biggest contributor with €8.4bn.
Ireland, which will contribute around €500m, will need to pass special legislation to help Greece, Finance Minister Brian Lenihan said. A European Commission spokesman later contradicted the German spokesman, saying no summit was needed.
"Clearly the problem with this plan is that Greece may be seen to have enjoyed an easy ride from the rest of the euro area," said Rossa White, an economist at Davy Stockbrokers. "For Ireland, it is unfortunate that the financial support package may cost almost 0.5pc of GNP given that it has taken its own painful measures in the last 18 months."
The deal, which would be worth €45bn in the first of three years, with more to be negotiated later, could amount to the biggest multilateral financial rescue ever attempted, dwarfing past IMF programmes for Mexico and Argentina. The existence of a detailed standby plan, even if Greece has not decided to invoke it, should help Athens auction a planned €1.2bn bond issue today.
A successful return to the markets would enable Athens to delay any request for aid at least until after a key German regional election on May 9, seen as a major political test for Chancellor Angela Merkel. Chancellor Merkel has lost popularity recently amid fears she is not protecting German interests.
Greek policymakers and media were under no illusion that a short-term boost might not be enough to prevent the country having to seek a bailout in the longer run.
"It offers a sigh of relief. . . but it doesn't solve our problems," said the centre-left newspaper 'Eleftherotypia', which supports Greek Prime Minister George Papandreou. "The country is heavily indebted and has to lower its debt if it wants to survive in the long term."
IMF managing-director Dominique Strauss-Kahn told an Austrian magazine the only solution for Greece in the longer-term was a period of deflation, in which wages and prices have to fall to regain competitiveness.
The euro will rally to at least $1.38 by the end of the week and will trade at $1.43 within three months as traders rush to cover bets that the euro will fall, Credit Suisse forecast yesterday.