Bloomberg News

‘Little Reason to Party’ Over Euro Plan: Analysts’ Comments

July 22, 2011

(Updates with additional comments.)

July 22 (Bloomberg) -- Analysts comment on 159 billion euros ($229 billion) of new aid for Greece announced by euro- area leaders late yesterday. Officials also empowered their 440- billion euro rescue fund to buy debt across stressed euro nations, aid troubled banks and offer credit-lines to repel speculators. The comments were collected from reports published by banks today.

Citigroup Inc.’s Valentin Marinov, a currency strategist in London:

“The key issue is whether the current bailout will lastingly reduce investors’ concerns about debt sustainability in Greece and the euro zone periphery more generally. We think not.

‘‘We suspect, however, that, given the new crisis fighting tools, any renewed increase in the peripheral risks are likely not to trigger a broad based risk-off. This should leave the euro close to recent lows against risk-correlated Group of 10 currencies.

‘‘We could see some more euro-dollar upside in the near term on the back of receding tail risks in the euro zone and lingering uncertainty about the debt ceiling debate in the U.S. Beyond the next few weeks, however, we suspect that the upside in euro-dollar could be difficult to sustain.’’

Morgan Stanley strategists led by Hans Redeker, head of foreign- exchange strategy in London:

‘‘What we did hear out of Brussels does not convince us that euro markets can remain stable for long. While the EFSF now has the flexibility required to deal with the challenges of protesting credit markets, the size of the EFSF has not been increased, leaving markets guessing how long it may take before this market-calming instrument may run out of funds.

‘‘Our guess is that the summer months will see volatile euro markets, which then may herald further strengthening of the Swiss franc. We like using this rally to sell Swiss franc into strength.’’

Bank of Tokyo-Mitsubishi UFJ Ltd.’s Lee Hardman, a currency strategist in London:

‘‘It represents a positive step forward in easing fiscal adjustment for the periphery, but crucially fails to significantly reduce solvency concerns.’’

‘‘The plan falls short of achieving debt sustainability with debt to gross domestic product ratios for Greece, Portugal and Ireland still likely to remain comfortably above 100 percent. A continuation of solvency concerns will leave the door open for contagion fears to rebuild. Beyond the new bailout euphoria, relative economic fundamentals are turning against the euro with growth in the euro-zone slowing sharply.’’

FxPro’s Simon Smith, chief economist and Michael Derks, chief strategist, in London:

‘‘Eventually, a forced default is still more likely than not. The euro will breathe a sigh of relief, but there’s little reason to party.’’

Societe Generale SA’s Kit Juckes, head of foreign-exchange research in London:

‘‘There are still plenty of details to be hammered out and it will need ‘selling’ in some countries, but we see this as both sufficient for a short-term relief rally for the euro and higher-beta currencies, and insufficient to prevent the crisis rearing its head again after the summer.’’

Barclays Capital’s Alan James, head of inflation-linked bond research in London:

‘‘Yesterday’s euro area heads of state meeting confounded market expectations by delivering most of the markets’ wish list including flexible credit lines and the ability for the EFSF to buy bonds in secondary markets, resulting in sharp tightening of European government bond spreads.

‘‘While there may be some further spread narrowing this morning on positive sentiment, despite the increase in the powers of the EFSF with no additional resources the scope for it to deal with any further issues in the larger southern European economies is limited.

‘‘On the other hand the notably lower interest rates that the EFSF will now apply to Ireland and Portugal significantly improve the prospects for fiscal sustainability in these countries and hence suggest a better environment ahead if the Greek resolution is relatively orderly.’’

High Frequency Economics Ltd.’s Carl B. Weinberg, chief economist in Valhalla, New York:

‘‘This is all pretty soothing, and pretty much the maximum that could be expected.

‘‘The plan is, essentially, to take the debt into the EFSF, where it will be financed for 15-to-30 years at lower-than- market interest rates with a 10-year grace period on debt repayment. Greece surely could not have expected anything better.

‘‘We have to hope that by showing that they can fix Greece, the EU governments have convinced the markets of the folly of speculating against Portugal or Ireland…or Spain… or Italy.’’

Brown Brothers Harriman & Co. strategists led by Marc Chandler in New York:

‘‘The final plan proposed by European policy makers has appeared to exceed market expectations and as a result the positive momentum and supportive risk backdrop should boost the euro in the short-term.’’

--Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.


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