The euro remains centre stage, holding on to its 3 week high of $1.30 against the US dollar although fresh nerves over Greece’s debt talks drained risk appetite.
The markets had expected an announcement from Greece over the weekend before the markets opened for the week but talks continue to drag on. Instead, the only announcement we had on Monday from euro zone finance ministers was a rejection of an offer made by bondholders to help restructure Greece’s debts. Whilst negotiations continue, there is frustrating lack of progress with the debt talks.
Consequently the US dollar firmed against most major currencies ahead of the Federal Reserve’s announcement tonight as to US monetary policy.
The pound lost some ground against both the euro and the dollar yesterday morning as it came under pressure after the release of the UK Public Sector Borrowing Requirement underlined just how arduous the UK economic recovery is going to be from record high debt levels. However, the fresh doubts over the Greek situation reversed the markets and the pound recovered its morning losses in the afternoon.
Meanwhile, the Financial Times (FT) reports in a front page piece that the International Monetary Fund (IMF) is putting the pressure on the European Central Bank (ECB) to also take a ‘haircut’ on its own €40 billion worth of Greek bond holdings. It is understood the ECB bought up these sovereign bonds below par value as part of the programme to save Greece from collapse back in 2010 and has also accepted them as collateral as a means of propping up the country’s banks. According to the FT, these bonds currently carry a yield in excess of 7% and the pressure is on the European monetary authority to forego profits in order to ease Greece’s debt loads.
The IMF also issued a stark warning, indicating that the euro area crisis entered a “perilous new phase” toward the end of last year, with the outlook prone to worsening, according to the IMF’s Economic Counsellor, Olivier Blanchard.
Significantly, in an update to its World Economic Outlook (WEO) the Washington-based lender states that, “Given the depth of the 2009 recession, these growth rates are too sluggish to make a major dent in very high unemployment.”
With Europe at its epicentre the current crisis may stall the world’s economy and, should it worsen, may plunge it back into recession it believes.
In a more hopeful tone, Mr. Blanchard added that, “(with the right set of measures) the worst can definitely be avoided, and the recovery can be put back on track. These measures can be taken, need to be taken, and need to be taken urgently.”
The Fund has thus cut its growth estimates for the world’s gross domestic product (GDP) in 2012 and 2013 to 3.3% and 3.9%, respectively, from the 4.0% and 4.5% rates of expansion previously estimated.
The IMF also suggest that in the case of the UK, the IMF now sees economic activity moving forward in those years at a pace of 0.6% and 2.0%, respectively, instead of the 1.6% and 2.4% rates of expansion it had pencilled in before.