Greece Rejects Greater EU Oversight

With Greek negotiations ongoing but yet to reach a conclusion, media chatter over the weekend was dominated by reports that Germany wishes to have greater oversight of Greece’s budget – a proposal that Greece has readily dismissed. The suggestion was endorsed by German cabinet minister Philipp Roesler, and reflects the widespread scepticism both across the market and amongst policy makers that Greece could struggle to bring its debt down to sustainable levels. Even if the bond swap discussions between Greece and its private investors manages to come to a positive (albeit later than expected) conclusion, it is clear that plenty of hurdles still remain for Greece’s credibility as a viable contributor to the Eurozone. As we approach Greece’s next major bond redemption date on 20 March, the level of market concern is only likely to increase which should put downward pressure on the euro over the medium term. Interestingly however, in the very short term we have witnessed the euro not only weather a spate of fresh ratings downgrades admirably, but also hit fresh highs above 1.3200. This is almost certainly a consequence of massive short positions undergoing a healthy and necessary correction – and may continue until we reach 1.3500 levels.   Looking at how the recent developments in Europe have impacted the FX market, is clear that the effect of credit agency downgrades is losing its bite, and the simple loss of triple-A status is no longer the seismic shock that it used to be. The timing of ratings agency downgrades throughout the last year has been questioned on more than one occasion – often coming as a ruthless thunderbolt to shatter some rare moment of détente in the market. Now, the constant stream of ratings downgrades or negative outlook warnings which the market has endured is inducing fatigue rather than fear. Inadvertently, ratings agencies like Fitch have made themselves less relevant through their activity rather than more. This factor may provide mild relief to European bond markets; but the real test will be whether investors prove willing to keep funding troubled sovereigns at debt auctions like today’s Italian bond sale.   Throughout the rest of the week, we expect market focus to remain on Greek negotiation developments, and of course, the upcoming bond auctions in Europe. As we move into the beginning of February, we should also brace for the latest non-farm payroll release out of the US (due on Friday) which should provide a fresh pulse on the state of the US labour market recovery.

By

M.Zohaib Gadit