Thursday, July 21, 2011

FOREX-Euro rallies on Greece deal, US debt impasse hurts dollar

Greek Prime Minister George Papandreou, left, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso speak after the EU summit Thursday in Brussels. - Greek Prime Minister George Papandreou, left, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso speak after the EU summit Thursday in Brussels. | AFP/Getty Images

Greece gets second bailout to prevent ‘contagion’

OTTAWA— From Friday's Globe and Mail
Greece will receive tens of billions of dollars in bailout money to pay its bills under a politically contentious agreement that is designed to avert a financial catastrophe in the 17-member euro zone.
Recognizing that saving the euro won’t be cheap or painless, European leaders agreed Thursday on a second massive infusion for the insolvent country in slightly more than a year, coupled with other concessions to help it deal with its enormous debt load.

They’re also moving to bolster a European bailout fund in a bid to stop a wider financial panic from developing and infecting the much larger economies of Spain and Italy – a prospect that threatened the survival of the single currency.
“What is at stake here is contagion,” French President Nicolas Sarkozy told reporters at the conclusion of an emergency summit in Brussels. “What we are doing for Greece we will do for no other country.”
But the price is steep. Analysts said the €109-billion ($148-billion Canadian) package, which involves cutting the interest rates Greece pays on some of its debt and extending the time it has to repay, will almost certainly be considered a default, marking the first time a euro-zone member hasn’t made good on its promises to lenders in the common currency’s 13-year history.
It’s uncharted territory that could have repercussions for Ireland and Portugal, which are being punished by investors demanding extraordinarily high interest rates in return for loans. A default will also cause pain for European banks, which have given Greece billions in the past decade and will now have to take losses on those loans.
The debt problems of the euro zone, which is nearly as large as the United States in economic importance, have rattled world financial markets for weeks. The fallout from the crisis is being felt in Canada, where the loonie pushed passed $1.06 (U.S.) Thursday to its highest level since 2007. With debt troubles in both Europe and the United States, some investors are seeking out safer places to park their money for a while, and Canada is one place they are finding refuge.
Later in the day, the Canadian dollar fell back, as markets reacted to the prospect that the EU had sidestepped a much larger crisis, for now. At least for a day, yields dropped on most European bonds and the euro rallied, suggesting many investors see the deal as a possible turning point in a crisis that has dragged on for 18 months. Stock and commodity prices rallied.
Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs in London, said the deal is “a big step forward to unconditional mutual help” among euro countries. Sharing the cost of defaults “helps everyone,” he explained.
Still, taxpayers in the continent’s rich countries – most notably, Germany – will have to shoulder a much heavier burden for the budgetary excesses of other nations in the currency zone. And that could slow economic growth across Europe.
Experts have warned for months that Greece was quickly burning through last year’s €110-billion ($149-billion) rescue and would soon need more cash. But leaders dithered as they tried to balance the reluctance of their taxpayers to bail out financially irresponsible neighbours and the fear that the euro zone might start to break up.
German Chancellor Angela Merkel, in particular, insisted that private investors, including many of the largest banks in Europe, should pay part of the tab for any future rescues. In part, this stand was to defuse anger among German citizens, who are frustrated that they should have pay for profligate spending in other countries.
Under the deal worked out Thursday, the average loan maturity on Greece’s bailout will increase to 15 to 30 years, up from 7½ years now, giving the country much extra time to get its finances in order. The interest rate will drop to 3.5 per cent. Loan packages for Ireland and Portugal would be similarly modified.Read more...

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