Greece and the Euro Zone

Currency in Crisis
The heightened concerns about the fiscal situation in Greece and by extension the other weak credits in the euro-zone may be a source of pressure on the euro, but more than likely it is simply encouraging foreign exchange participants to do what they wanted to do in any event and reduce market exposure, which means buy back short dollars, ahead of the end of the year and the impact of which is being exaggerated in thinner holiday markets. Fitch had previously cut Greece's sovereign rating and maintained a negative outlook. S&P simply played catch-up yesterday.

Moody's has yet to move and that is another shoe waiting to drop. There are new concerns today and the Greek bonds continue to get hit. European papers report that some European health care companies have complained to Brussels about Greece's public health care system being in arrears to the tune of 7 bln euros and concerns about the country's defense bill that appears to be off-budget. As we have pointed out, one of the looming dangers is that as the ECB normalizes its collateral rules that Greece's BBB+ rating, if not cut again, may not be acceptable, which would cut Greek banks off from an important source of financing. In terms of broader European support we note conflicting signals, which do investors little good. Germany's Merkel was quoted on Dec 10 that Europe has a responsibility to help Greece. While the ECB seems a bit cooler, we have suggested that its long date refi operations act as indirect fiscal support for the weaker credits in Europe. Earlier this week, Greece privately placed 2 bln euros of floating rate notes with Italian and Greek banks, according to reports (at around 260 bp on top of 6-month Libor). Some of those funds might have been borrowed from the ECB in its last 12-month refi operation at a rate of 1% (indexed to the ECB's refi rate).
Greece and the Euro Zone Greece and the Euro Zone Reviewed by magonomics on December 17, 2009 Rating: 5
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