MarketsMighty euro, on track for best quarter since 2011

30 Jun 2015 | Author: | No comments yet »

Euro Weakens as Greece Crisis Pushes Currency Into the Unknown.

BEIJING — Asian stock markets recovered on Tuesday, but European shares lost further ground as Greece moved within hours of default on a loan repayment due to the International Monetary Fund. All together the country owes 240 billion euros to the troika of European Commission, European Central Bank(ECB) and IMF.With the default, chances are Greece will have to exit from the Eurozone and stop using euro as its currency. The single currency dropped versus all but two of its 16 major peers as Greek Prime Minister Alexis Tsipras dared European leaders to throw his nation out of the monetary union after calling a referendum on their conditions for aid. Some investors still believed Greece might find a way to remain in the euro zone, or that the contagion effects to other European markets can be contained. ET) to repay the $1.8 billion it owes as part of a $270 billion aid package it received from the IMF, European Central Bank and European Commission — 19 eurozone governments — during the financial crisis.

He set out details of how a bailout accord could still be reached, according to a European Union official, who asked not to be identified because the talks are private. “What happened has extended the will-they-won’t-they saga,” said Derek Halpenny, head of European markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The whole thing is very fluid,” yet “people still think there’ll be a ‘yes’ result and there’ll be a resolution to this. Ahead is a possible referendum for Sunday on whether to accept the deeper austerity cuts demanded by the European partners and lenders that provide Greece’s financial lifeline. “Greece and the outcomes of a rejection of austerity have always been a known unknown, but the timing and sheer defiance from the Greeks have startled markets,” said Chris Weston, chief markets strategist at IG in Melbourne, in a daily market commentary. “Traders have been smacked into action and a real wake-up call has been provided.” In Asia, Japan’s Nikkei 225 index rose 0.6 percent Tuesday, after a fall of nearly 3 percent the previous day. The MSCI Asia Pacific Index, a composite of regional shares excluding Japan, rose 1.19 percent after falling twice that amount Monday to reach a five-month low. While there’s no rule to say Greece would have to leave the euro if it skips the IMF payment or fails to extend its financing arrangements, it may prove difficult to stay in if, for example, the country has to start printing its own currency to keep its financial system afloat.

Greece’s Ekathimerini newspaper reported Tuesday, citing unnamed government sources, that Athens is reconsidering a previous proposal by European Commission President Jean-Claude Juncker. The Shanghai Composite Index was down more than 5 percent at one point, but recovered to end 5.5 percent higher after the central bank injected liquidity into the money market, and the state pension fund said it would aim at investing 30 percent of its vast holdings into domestic equities. A Greek eurozone exit, if it comes, it is feared, may reignite the financial contagion experienced during the sovereign debt crisis when billions of dollars were wiped off the value of European government debt and other assets. The ECB also has its as-yet-unused Outright Monetary Transactions plan, under which it could buy unlimited quantities of the bonds due in one to three years of member nations that meet certain criteria. “The ECB still have the option of front-loading QE and there is still the big bazooka of the OMT,” Sam Tuck, a senior currency strategist, and Mark Smith, a senior economist, at ANZ Bank New Zealand Ltd., wrote in a June 30 note. “Despite this, fears of contagion linger.” After its recent gains, the euro is also under pressure from monetary policy divergence as the Federal Reserve moves closer to raising interest rates, said Eric Stein, who manages the Global Macro Absolute Return Fund in Boston at Eaton Vance Corp.

Still, while many analysts and officials have warned that Greece leaving the eurozone could have far-reaching consequences for economies and markets across the world, the specific impact of that possible development remains mostly unclear. “If Greece leaves the eurozone, there is unlikely to be a big bang moment when the country adopts the drachma (the currency it used prior to adopting the euro in 2001),” said Mark Zandi, chief economist at Moody’s Analytics, a unit of the ratings firm. The Shanghai index still ended the first half of the year around 32 percent higher, the South China Morning Post reported. “It is in China’s interest,” he said, according to Reuters. “We would like to see Greece staying the euro-zone and we urge the international creditors to reach an agreement with the Greek side.” Between 1990 and 2010, nearly 1.6 trillion euros have gone from west to east to pay for all kind of things from pensions and salaries of government employees, to build roads and cities, and factories.

Tsipras’ leftist Syriza party insists the vote is being called to strengthen its negotiating mandate with its creditors. “If the Greek people want to proceed with austerity plans in perpetuity, which will leave us unable to lift our head, we will respect it, but we will not be the ones to carry it out,” he said on Greek television late Monday. Fed Chair Janet Yellen indicated this month that policy makers will probably take a gradual approach to raising rates amid concern the recovery is uneven. “The dollar’s recent moderation should give the Fed more confidence it can begin the path of slowly hiking interest rates,” Eaton Vance’s Stein said.

This gave the German exports a push that was badly needed and ensured that the share of exports in the total German GDP shot up from 22% to 33% between 1993 and 2000. In a monetary union without a political union the labour force can’t move around freely and this hurts the industries and economies of one set of countries. Let’s say that the wages in Germany are lower and are rising at a much slower rate than wages in Greece, where the wages are higher and rising at a faster pace. Hence, the competitiveness that Germans had acquired because of lower wages would go away and businesses in Greece and other countries would be equally competitive. As the writer Michael Lewis said in an interview “The Greeks will never be as productive as…Germans, and the Germans will never be as unproductive as…Greeks.” Niall Fergusson, the premier economic historian of this generation is of the opinion that a politician union of the countries in the Eurozone has become a necessity.

The effects of any country leaving the euro could go far and wide. “It could even be a tsunami that hits New York,” he said in a interview to the Sunday Times of London a few years back.

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