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Greek PSI Optimism Steals the Limelight from Central Bank Rate Decisions

Fitting in with recent trends in the Eurozone debt crisis, events which once would have been classed as momentous are taking place in the background whilst ‘crazy’ new concepts take centre stage. Much like libraries since the internet ‘came out’; the central bank rate decisions have had little effect on the market where they once ruled the roost.

Both the European Central Bank and the Bank of England maintained their current interest rates at 1.0% and 0.5% respectively. Considering the BoE’s asset purchasing scheme was upgraded very recently nobody expected an increase in Quantitative Easing, and their expectations were fulfilled as the central bank announced that the asset purchasing facility would remain at £325 billion. The ECB’s makeshift QE programme, the Long Term Refinancing Operation (LTRO), also kept the door firmly shut to any upgrades following last week’s liquidity injection of €529 billion in cheap 3-year loans.

The Pound to Euro Exchange Rate didn’t have much to say about the central bank rate decisions, and it hasn’t reacted with volatility to ECB President Mario Draghi’s Press conference either. Draghi reduced Eurozone growth projections, citing “intensification of tensions in Euro area debt markets and their potential spill over to the real economy” and downside risks related to “further increases in commodity prices” – by which he means that there is a danger of banks freezing up and Iranian oil prices spiralling out of control.

The Eurozone GDP growth projection fell from (between -0.1% and 0.3%) to (between -0.5% and 0.3%). They also reduced GDP outlook for 2013 from (between 0.3% and 2.3%) to (between 0% and 2.2%). However the reductions lacked the intensity needed to move the markets and went by largely unnoticed.

Draghi went on to emphasise the positive initial impact of the LTRO’s 2nd round of liquidity injections before urging Eurozone leaders to push forward with structural reforms in order to stimulate competitiveness, reduce unemployment, minimise budget deficits and return to growth.

Whilst Draghi had a lot to say about the steps he has taken to improve the Eurozone economy, the markets did not…

News that Greek PSI bond swaps were going well impacted the markets at around 11:00 AM, the Pound to Euro Exchange Rate fell from daily averages around 1.197 to a significantly lower 1.192.

65% cooperation is needed by Greece’s creditors for the deal to go ahead.  But if less than 90% sign up, then Athens will be permitted to activate Collective Action Clauses (CACs) to force all other credit holders into taking the debt haircut.

Earlier in the morning investors holding at least 61% of Greek debt had signed up to the swap that could see them lose 70% real value of their bonds. This progress saw the Euro well bid as market sentiment took a turn for the optimistic. The Pound to US Dollar Exchange Rate also improved by roughly the same amount rising up through 1.578.

Since the initial EUR/GBP and GBP/USD rallies the markets have remained in hibernation – not to be stirred even by the central bank rate decisions – as they await the result of the PSI debt swap deal at 20:00 this evening. The smoother the bond swap deal goes the better it bodes for the Euro and global risk sentiment.