Bloomberg News

Euro Falls on Concern Europe Leaders Failing to Resolve Greece

June 17, 2011

June 17 (Bloomberg) -- The euro fell for a third day versus the yen and slid against the dollar as European leaders prepared to discuss Greece’s debt crisis amid concern a default risks spreading contagion to other countries.

The single currency headed for a second weekly drop versus the dollar and the yen after Luxembourg’s Jean-Claude Juncker said a “haircut” for holders of Greek securities would have unpredictable after-effects. Prime Minister George Papandreou will announce cabinet changes today after failing to garner support for austerity measures. Switzerland’s franc weakened for the third day in four against the dollar.

“Risk aversion is high at the moment and the source of that is the fear of contagion from Greece and the rest of the euro-zone’s periphery,” said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets Europe in London. “Downside risks to the euro remain, although there is hope that there will be words of comfort from Germany and France today which would lend it some support.”

The euro depreciated 0.7 percent to 113.75 yen as of 8:50 a.m. in London from 114.56 yen in New York yesterday, extending this week’s loss to 1.2 percent. The shared currency dropped 0.4 percent to $1.4142, for a weekly loss of 1.4 percent. The dollar lost 0.2 percent to 80.48 yen, from a previous close of 80.63.

The Swiss franc declined 0.2 percent to 84.91 centimes per dollar, taking its decline this week to 0.7 percent. Against the euro, the franc added 0.3 percent to 1.20032.

German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet today in Berlin to discuss a rescue package for Greece. EU finance ministers agreed on June 14 to convene again on June 19 after they failed to reconcile a German-led push for bondholders to shoulder part of the cost of a new plan for Greek aid.

Greece ‘Haircut’

“A hard haircut would risk contagion for many European countries with unpredictable consequences,” Juncker said in an interview, according to the German newspaper Tagesspiegel. “It will be an extremely difficult process for the Greeks” to execute policies ensuring they pay back their debt, he said.

Papandreou is struggling to gain parliamentary approval for a 78 billion-euro ($110.3 billion) five-year package of budget cuts and asset sales by July to ensure the country receives a new EU aid package to avoid the euro-area’s first default.

Aid for Greece “is dependent on the Greek parliament passing the additional austerity package,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “That’s going to limit the potential for any bounce in the euro.”

Banque Nationale de Belgique SA Governor Luc Coene said he sees the crisis in the Greek government as the main stumbling block, according to remarks cited by De Standaard.

European officials are likely to agree on some assistance for Greece and an announcement over the weekend that a package is imminent will boost the euro in the short-term toward $1.45, said Thomas Harr, head of Asian foreign-exchange strategy at Standard Chartered Plc.

‘Contagion Risk’

“Our base view is that there will be some kind of agreement,” Singapore-based Harr said. Longer-term “the bias is clearly lower, because it would only be a relief rally and it doesn’t change the fact that eventually Greece will have to default and there is still a lot of contagion risk to the likes of Portugal and Ireland.”

The cost of protecting Greek bonds against default for five years climbed to a record 2,236 basis points on June 16, indicating traders expect Greece to fail to pay its debts.

A Greek default is “almost certain” and could help drive the U.S. economy into recession, Former Federal Reserve Chairman Alan Greenspan said.

“The problem you have is that it’s extremely unlikely the political system will work” in a way that solves Greece’s crisis, Greenspan said in an interview yesterday with Charlie Rose in New York. “The chances of Greece not defaulting are very small.”

Australia’s dollar slipped for a third day against its U.S. counterpart as a decline in Asian stocks reduced demand for higher-yielding assets. The MSCI Asia Pacific Index of shares fell 0.6 percent, reversing an earlier gain.

The so-called Aussie weakened 0.4 percent to $1.0516, and dropped 0.6 percent to 84.66 yen.

“Reduced risk appetite is weighing on the Aussie,” said Kengo Suzuki, manager of the foreign bond department in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank.

--With reporting by Candice Zachariahs in Sydney. Editors: Keith Campbell, Paul Armstrong.

To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net


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