Deal Done But Euro Fails at 1.3000

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After another marathon negotiating session the EZ finance ministers finally approved another tranche of bailout funds for Greece but EURUSD saw a limited reaction taking out the 1.3000 barrier only to fall back below the figure in the aftermath of the news. Overall Greece will receive 43.7 Billion euro in a series of stages from the Troika. The IMF share will be paid out all at once, once a buy back of Greek debt has occurred in the coming weeks. The ECB will hand back 11 Billion in profits it made on its sovereign debt holdings of Greek bonds and the EU will provide additional financing with the goal of reducing Greek debt to GDP ratio to 124% by 2020.

The lenders also sought to cut interest rates for Greece and extend the maturity by 15 years to 30 years overall granting Athens 10 years of interest deferral. The parties also agreed to cut rates on the already extended bilateral loans from 150bps above cost to 50bps above cost once Greece achieves a 4.5% primary surplus.

In short the Greek deal offered nothing unexpected and perhaps the greatest positive was the fact that it was done at all given the last minute wrangling and delays that marked the negotiations. For now it provides a modicum of relief for the EZ sovereign debt crisis taking Greece off the radar for the time being. However, the just finished bailout talks did not offer any long term structural reform for reducing Greece’s massive debt burden and as many analysts have pointed out all of the parties will likely be back at the negotiating table 6-12 months from now looking for yet another rescue.

The EURUSD broke through the 1.3000 level in the immediate aftermath of the announcement, but has since failed to retake the figure several times as profit taking kicked in. After its near 300 point rally over the past week and a half the pair is due for some consolidation. Even if it takes out the 1.3000 barrier later on in the day it may face more resistance in its attempt to rally further as long term overhead supply is likely to weigh on the unit.

Having solved the temporary financing issues the EZ won some short term relief, but the region’s sovereign debt crisis will likely dog the policymakers into the foreseeable future especially if the economic data from core of the EZ begins to disappoint, sparking fears amongst investors once again.

Boris Schlossberg
Managing Director

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