Grexit threats ‘far from over’
THE euro tumbled against the pound and the dollar yesterday despite a last- ditch deal to save Greece from bankruptcy and expulsion from the single currency bloc.
Eurozone leaders agreed an €86bn (£61bn) bailout for the stricken nation – its third in five years – after marathon talks in Brussels over the weekend.
The Greek parliament must sign up to the terms of the deal – including tax rises, spending cuts and pension reforms – by tomorrow night to stave off financial catastrophe. The agreement looks to have secured Greece’s future in the eurozone – at least for now – bringing to an end months of speculation over a Greek exit or so-called ‘Grexit’.
‘ There will not be a Grexit,’ declared European Commission chief Jean-Claude Juncker.
Greek Prime Minister Alexis Tsipras, who finally succumbed to Europe’s demands after months of brinksmanship, said ‘the possibility of Grexit is in the past’.
The euro spiked higher on news of the deal but then slammed into reverse as investors worried about the outlook for the region dumped the single currency. It fell more than 1pc to as low as 71.88p and $1.1007.
‘This is not over yet, in fact it might be far from over,’ said Anthony Lawler, a portfolio manager at investment firm GAM in London.
He warned that ‘it is not at all certain’ that the Greek parliament will accept the terms of the deal.
And he added that the euro faces further weakness as the European Central Bank pumps newly created cash into the region’s economy at a time when the Bank of England and Federal Reserve are considering interest rate rises in Britain and the US – pushing up the pound and the dollar.
‘We believe the Fed will raise rates before the end of the year which on the margin we believe will continue to help the dollar,’ said Lawler.
Julian Jessop, chief global economist at Capital Economics, said: ‘The euro remains vulnerable to a resurgence of uncertainty over Greece’s membership of the single currency and the risks of contagion. But even if Grexit were off the table completely, the prospect of a sharp divergence in monetary policy between the US and the eurozone points to renewed euro weakness.
‘Indeed, any reduction in concerns over Greece – and China – may simply clear the way for the Fed to begin raising US rates sooner and further than the markets currently anticipate.’
The reaction to the deal was more positive on European stock markets with the FTSE 100 index closing 1pc or 64.57 points higher at 6737.95. The German stock market was up 1.5pc while the main French benchmark rose 1.9pc. European banks led the way with gains for Societe Generale, Credit Agricole and UniCredit.
Greek borrowing costs also tumbled with the yield on two-year government bonds at around 25pc having soared above 57pc last week. The 10-year bond yield settled at around 12pc versus 19pc last week.
The ECB is expected to meet tomorrow evening in Frankfurt to discuss whether to extend so-called emergency liquidity assistance (ELA) to Greek banks. Greece’s lenders have closed their doors and put limits on cash withdrawals in a desperate bid to stay afloat – surviving only thanks to an €89bn (£63bn) lifeline from the ECB.
But if Athens defaults on the €3.5bn (£2.5bn) it owes the central bank on July 20 the ELA is likely to be turned off – leading to the collapse of the Greek banking sector.
‘The Greek parliament is being asked to surrender unconditionally,’ said one eurozone central bank official, suggesting that the ECB could change tack on emergency funding if action did not come soon. ‘If they don’t deliver by Wednesday, it’s going to be tough.’