Sunday, February 14, 2010

EU to support Greece, if needed

At today’s EU Heads of State summit, the European Union agreed unanimously to the principle of supporting Greece, but no concrete aid steps were announced. Additional details could be unveiled at the Ecofin meeting on Tuesday, February 16. Statements after the summit suggest that there’s no ex-ante decision to rescue, but there’s a strong commitment to do so if and when the need arises. Seemingly, today all possible technical tools were discussed. Some EU sources have been quoted saying that:
1. Support could be structured in stages, depending on the level of need
2. Countries could participate according to their weight in the eurozone
3. Support options could vary from country to country
As expected, the ECB and the IMF will not be involved financially in the plan. The ECB welcomed the EU pledge to take coordinated action if needed, and stated it will work jointly with the EU in defining Greece’s fiscal consolidation path, and in monitoring its implementation. The IMF praised the agreement, and offered its expertise, if needed. FI: Markets are now more confident that Greece will receive support, if needed. Once it was clear that no details would be revealed today, peripheral countries came under moderate pressure, although not enough to erase gains posted earlier in the day. The main message retained by investors is that the outlook for periphery is improving. From yesterday’s closing level, 10Y GGB-Bund spread tightened 9.5bp, and Portugal and Ireland were similarly well supported. FX: The euro was battered again, with investors being ultimately frustrated by the overall lack of details regarding the EU leaders’ decisions and by the general feeling that this move will not be enough to fully dissipate ongoing EMU-related concerns. There is still risk that more selling pressures may hurt the EMU unit in the coming days, with the Ecofin meeting on Tuesday unlikely to offer EUR-USD a lasting support. Actually, a pullback above 1.3840 is needed in order to at least just freeze the intense selling pressure. On the other hand, the risk of a further drop towards 1.34/1.3390 has increased, especially if the 1.35 base also falls.
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