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By Shavasb Bohdjalian
Forex traders warmly welcomed the EU sumit accord, which essentially means Greece has been saved, removing the main uncertainty which had dominated the forex markets over the past few weeks. Fitch has already announced that it may put Greece on restrictive default, while Moody’s downgraded the country to Ca from Caa1 citing major losses for private investors. What is important that Greece’s financing gap will be entirely covered until 2014 by the EU, the IMF and a voluntary contribution by the private sector.
French President Nicolas Sarkozy said measures agreed at the summit, the fifth this year on the crisis, would together reduce Greece's debt by 24 percentage points of gross domestic product from about 150 percent today.
Greek Prime Minister George Papandreou said the deal would cover his country's funding needs until 2020 and make its debt sustainable, but analysts questioned whether the reduction would be enough to avoid a restructuring in the medium term.
The most important aspect is that a minimum EUR 109 bln in additional funding will be provided with the interest rate lowered to 3.5% and the maturity of the bonds extended from 7.5 years to between 15-30 years.The private sector will contribute about EUR 54 bln by exchanging bonds for longer maturities with lower interest rates and by buybacks.
There are still plenty of detail to be hammered out and it will need ‘selling’ in some countries, but the overall risk for the euro has been removed with or without the rating agencies placing Greece in default.
Banks and insurers will voluntarily swap their Greek bonds for longer maturities at lower interest rates to help Athens. The Institute of International Finance, which represents over 400 firms and led talks for the private sector, said the bond exchanges would help reduce Greece's EUR340 bln debt pile by 13.5 bln. Four options will be offered to private sector creditors taking part in the plan: three offers to exchange Greek government bonds and one offer to roll over Greek bonds into debt with maturities of up to 30 years. In addition, there will be a bond buyback scheme. It predicted a 90 percent take-up rate by investors; several sources said the resulting net contribution would mean a write-down of about 20 percent on the value of banks' Greek bond holdings.
Acknowledging that the swap scheme may lead to Greece being declared in selective default , Sarkozy said euro zone nations stood ready to protect Greek banks from the fallout, by providing credit guarantees if needed to ensure they can still obtain liquidity from the European Central Bank.
Now what? Well the euro is now safe and if and when the 1.40-1.45 range breaks, it will mount a challenge on the previous high of 1.50, but the real solution to the problem will only be delivered if Greece manages to proceed with its privatization plan aiming to raise EUR 50 bln, it continues to lower public expenditure and produces a primary surplus before interest on its loans. If Greece does not deliver, and there is a good chance that it will not, then the problem will resurface sometime next year. In the meantime, the other troubled countries, namely Ireland, Portugal, Spain, Italy and Belgium also need to keep cutting expenses and delivering a balanced budget by 2014 the latest to send a powerful signal that eurozone nations are serious in tackling their chronic problems.
The euro and the eurozone have passed another endurance test and shown that when pressed against the wall, EU leaders can deliver solutions to solving their problems. Attention will now turn to the US, which not only needs to raise the debt ceiling by August 2, but also needs to find a solution to resolving its huge budget deficit.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. Eurivex allows forex trading through MT4 platform and offers forex managed account services. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
