Greece aid gives boost to euro

26 March 2010

The euro has tentatively emerged from the doghouse after the European Union finally reached an agreement for an emergency facility to help Greece in its debt woes.
The single currency rallied against the pound, the dollar and the yen after eurozone countries and the International Monetary Fund rallied round troubled Greece to offer a €22 billion safety net if it runs into further problems trying to manage its huge debt mountain.
Eurozone countries would provide up to two thirds of the loans if Greece became unable to access cash from the markets.
The rebound comes after a trying week for the euro in which it hit 10-month lows against the dollar before the support package was confirmed.
However, commentators warn that although the measures will ease the near-term pressures on the euro, the danger is far from over.
Concerns also persist over the strength of other EU countries including Portugal, which also has high levels of government borrowing.
Analyst Chris Alexander, of BNP Paribas Wealth Management, says: "The Greek 'rescue package' looks a fragile affair and compromise; for the time being it should provide a Greek safety net, but it may in the longer term have done the euro little good in that the deal appears to treat symptoms - not cause - a point emphasised by the People's Bank of China."
He adds that despite the euros small gain against the greenback, there is an increasing consensus of further downside risk materialising.
Jonathan Loynes, chief European economist at Capital Economics, believes Greece is still going to have to pay a "heavy price" to meet its financing needs.
"Any loans would be at market interest rates, which are still very high. And more importantly, Greece still faces an extremely serious economic crisis," he says.
The economy is likely to come under heavy pressure for years to come from tighter fiscal policy and a painful period of wage and cost reduction required to improve competitiveness.
"That would not matter so much for the eurozone if Greece were alone. But it clearly isn’t, as recent news on Ireland and Portugal has underlined. Against that background, we suspect that any relief for the euro will be short-lived," Loynes explains.
Investors remain cautious with many unsure of how the Greek bail-out plans would actually work.

Joshua Raymond, market strategist at City Index, says: "Euro buyers are likely to focus on whether austerity measures gain traction and see if there is any further spill over into the wider EU community, particularly after Fitch downgraded Portugal’s debt rating earlier in the week."
Meanwhile, sterling continues to struggle in the wake of a weak Budget on Wednesday. It stood down 0.5% against the euro at €1.11 and up marginally on the dollar at $1.487.

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