The U.S. Presidential election is now a mere memory, and there is a near certainty that the U.S. Dollar is likely to continue to depreciate (or at least fail to strengthen) under one of the loosest monetary policy regimes in the developed world. As a consequence, the Euro’s future direction will largely be determined “in-house,” i.e. from elements within the Eurozone.
Currently, the pressure is on the common currency, with investors’ focus turning to Greece, yet again. Unlike past occurrences when Greece’s government had to wrestle with coalition parties to pass through austerity and budgetary legislation, pre-conditions to the release of the funds, this delay is the result of a squabble among the entities which are holding the purse strings. Of course they are the European Central Bank, the International Monetary Fund and the E.U. policymakers, or collectively, the Troika.
The concern, of course, is the timing of the release of the next payment of the bailout loan that was agreed to originally by the Troika. By all appearances, the payment’s release won’t come anytime soon and the Greek government is already trying to make provision for the funding shortfall by holding an auction of short-term treasury bills. Greece sold €2.762 billion of 1-month bills at a yield of 3.95% and €1.3 billion 3-month bills at a yield of 4.2% (four basis points higher than a similar sale last month) for a total of €4.06 billion. While that will be insufficient to service €5 billion in maturing debt, over the next two days the Greek Treasury can sell paper more non-competitively to make up the difference.
Forex market players had anticipated the probability that Greece’s parliamentary vote might be delayed (which surprisingly, it wasn’t), but they had not envisioned that the Troika itself would stand in the way of the payment. Now, it doesn’t look like any decision will be made until after November 20th when the E.U. finance ministers meet again. One analyst pointed out that it will be vital for the payment to be released by the end of the month or else Greece’s government will simply run out of money.
It’s obvious that policymakers are aware of the impending financial crisis Greece might suffer as a result, so why are they dragging their proverbial feet at this juncture is a valid question. In this case, the delay is the result of a very public disagreement between two-thirds of the Troika. The head of the IMF, Christine Lagarde has been going head-to-head – very publicly – with Jean-Claude Juncker, the chairman of the Eurogroup of Finance Ministers. Lagarde has insisted that in line with previous agreements Greece must lower its debt to 120% of GDP by 2020, while Juncker said that the deadline should be extended by two years to 2022 to give Greece’s economy additional time to recover. While it would appear on the face of it a display of generosity on the part of the E.U. governments, the fact is that if Greece is unable to meet the imposed target by 2020, the various Eurozone countries which are also Greece’s creditors might be forced to accept additional haircuts on their loans. Unless there is agreement between the E.U. governments and the IMF, the next bailout tranche won’t be released as both entities concurrently disburse the payment.
Any modifications to the existing agreement will also call for Parliamentary approval within the countries which have been funding the European Financial Stability Fund and the European Stability Mechanism. Germany will most certainly join the foot draggers; the German government and its citizens believe that they, as the Eurozone’s largest and most successful economy in the Eurozone, will bear the brunt of the costs for a Greek bailout. The German government is trying its utmost to protect its citizens thus any amendments to the existing provisions of the bailout agreement must be agreed to by the German Parliament which does not meet until sometime next week.
Since mid-September the Euro has lost 3.7% of its value versus the U.S. Dollar and analysts see a bearish future ahead. Expectations that the EUR/USD pair might recapture $1.30 are now being significantly lowered. It’s clear that there is very little news that could provide sustainable support for the Euro, but quite a lot which could give more momentum to Euro’s downslide.