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By Gaurav Kashyap, Head of DGCX Desk at Alpari ME DMCC
After more than 13 hours of negotiations, European finance ministers reached an agreement early on Tuesday morning to authorize Greece's second bailout worth €130 billion along with a debt-restructuring agreement which sees greater losses for private sector creditors, who now face debt write downs of 53.5%, well in excess of the original 50% expected.
The IMF's participation would be in the region of €10-15 billion with the ECB to funnel profits generated from Greek bond holdings to Eurozone nations which would be used to reduce Greek debt. Also agreed was reducing the interest to 150 basis points (down from 250-300 basis points) on the original loans Greece secured during its first bailout in order for the nation to free up additional liquidity in its bid to target a debt to GDP ratio of 120.5% by 2020.
The agreement now shifts to member countries' respective parliaments for approval, with the German parliament meeting on Monday for official approval. The immediate take away of the deal is that Greece's issues have been alleviated in the short-term and the spread of contagion risk has subsided in the interim however question marks still remain about how a Greek economy which is in its fifth successive year of recession will respond to additional spending cuts and deep austerity measures in a bid to achieve that target debt-to-GDP ratio of 120.5% by 2020.
Euro benefits from debt deal announcement
With the Greek announcement coming early in the week, the EUR found enough momentum to break through a key resistance level between 1.33-1.3350 against the US Dollar which had originally been a staunch ceiling in any upward moves in the pair. The EUR also benefitted from an improved German business sentiment survey released on Thursday which showed that the business climate in Germany improved to 109.6, beating expectations of 108.8. The German IFO for current assessment which measures business conditions trumped expectations with an actual release of 117.5.
British pound suffers following Bank of England minutes
Across the channel, the British Pound weakened in trading this past week following a rather dovish Bank of England meeting minutes.
The minutes released on Wednesday showed that two members of the MPC voted for additional easing measures for the UK economy, sparking speculation that there could be an addition to the existing £50 billion QE program. Contributing to the bearish momentum in the British Pound this past week was Friday's GDP reading which came in slightly weaker than expected. Year on year GDP in the UK came in at 0.7%, down from an expected 0.8%. The British Pound depreciated to its weakest level against the EUR in 2012, smashing through the 100 WMA to close at 0.8471. GBPUSD closed the week 0.18% lower, but held above the 100 WMA to close at 1.5874.
China reduces reserve ratio requirements
And finally, China this week reduced the reserve ratio requirement by 50 basis points in a bid to promote lending and facilitate additional growth. Such measures have been seen as required for a nation which many feared was going through a hard landing. A recent HSBC PMI manufacturing data, which measures the manufacturing activity in China showed a reading of 49.7, an improvement over the previous reading of 48.8, however below 50. A reading below 50 indicates that manufacturing activity is contracting as opposed to expanding.
The Australian Dollar, a currency which is particularly sensitive to Chinese data, was mixed in trading this week closing the week 0.71% lower against the US Dollar.
Staff
