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Will the Greek Austerity Plan Pacify The Markets?

Last updated 3/3/2010 5:01 AM ET (GMT -5) 7 Comments

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Boris Schlossberg

Director of Currency Research, GFT

The EUR/USD rallied to reach session highs as news of Greek austerity plan began to trickle out to the market. According to Dow Jones newswires, the Greek government will increase the VAT tax to 21% from 19%, freeze all pension payments and reduce civil service wages by 12% in an effort to control its growing budget deficit this year. Greek bonds responded positively to the news as GGB/BUND spreads narrowed to 293bps from 300bps prior to the news .

Greek Prime Minister George Papandreou  will travel to Germany and France in the next several days to consult with Eurozone’s two most important members and obtain their seal of approval on the deal so that Greece could once again access bond markets on favorable terms.

At first glance, the Greek plan appears to have made serious progress in addressing the fiscal budget deficit problems that have wreaked havoc on its capital markets since the start of the year and is likely to assuage the ratings agencies who have threatened to down grade Greek government debt below investment grade.  

The bulk of the cost savings falls squarely on the public sector in Greece and it is unclear as of yet just how much resistance the government will meet from the civil service unions. Nevertheless, the austerity measures are likely to increase the credibility of the Greek government and make it easier for Greek fiscal authorities to receive support from the Germans and the French.

Overall, tonight’s developments should prove positive for the EUR/USD which has been held down  by growing market concerns over the burgeoning fiscal deficit problems in Southern Europe and fears that these economic pressures could exacerbate the risk of fragmentation in the region. The pair traded to 1.3650 in the wake of the announcement and could try to test the 1.3700 barrier as the day progresses if markets become convinced of the credibility of the plan.  

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Comments (7)

schultzz.at

March 03, 2010 at 05:37 AM ET

Besides the Greek austerity plan: The EU finance ministers (Ecofin) are approaching the ECB to conduct their own rating of EA16 countries to be no longer at the mercy of S&P, Moody's and Fitch.
'The agencies got it totally wrong in case of Lehman. Who guarantees that they are correct now?', was a statement from Ecofin according to 'Handelsblatt'. The ECB was not available for a comment, but they are said to have a favorable opinion on the approach.
According to estimates the ECB would have to dedicate 10-20 employees to conduct the ratings.

I think European government balance sheets have been 'Enronized' to fulfill the Maastricht criteria. The desire to hide the details from international agencies and investors is perfectly understandable.
Tom Schultz.

alexjbrandt

March 03, 2010 at 07:37 AM ET

I believe the Rating Agencies are being investigated for their practice or approval of giving AAA rating to CDO's that ended up being worthless, funny how a financial crisis brings out the skeletons in the closet. I whole heartily agree with the EU finance ministers in that rating agencies can not be relied upon for an accurate rating, especially since they get paid by the very institutions they rate! Anyways, the Attorney General of Ohio is supposedly preparing a lawsuit against the 3 major rating agencies.

schultzz.at

March 03, 2010 at 08:46 AM ET

I think the little accountant at the rating agency had an incentive to stick a 'AAA' onto a 'security' rather than delve into details and be picky. But it is entirely correct that the case is investigated and conflicts of interest are uncovered.

However, I am not sure whether ECB staff will not face similar conflicts of interest. Besides this, how should international pension fund managers behave if the rating institution and possibly the methodology changes?

I honestly think that in the current European debt crisis, politicians are desperately looking for 'scapegoats'. Neither rating agencies nor credit default swaps have brought this crisis upon us, but decades of reckless deficit spending.
Tom Schultz.

alexjbrandt

March 03, 2010 at 09:33 AM ET

If the methodoly was to change about how ratings are conducted, I think everyone will be better off and the pensions fund managers will just have to divest or change their holdings. Any losses couldn't be worse then the stock market wiping out trillions of dollars in 401k's when it crashed.

ECB probably wouldn't accept payment from the company that they are rating, otherwise why turn to the ECB for ratings when thats the current system? I agree, politicians are looking for scapegoats, but the major financial institutions did help create the mess. Deficit spending by governments is a totally different animal (in my mind) than derivatives/securities that helped cause the mess. If Goldman Sachs or Wall Street contributes to the destabilization of a country economically (such as the currency swaps it did to help Greece hide its debts from Investors) then all the work governments have done to prop up their respective economies will be for nothing. As Ben Bernake said last week, what Wall Street did in aiding Greece to hide its debt is very counterproductive.

Demax

March 03, 2010 at 06:22 AM ET

Unlikely (in response to your article headline).

The level of austerity required is almost certain to precipitate considerable unrest and quite possibly a marked risk of civil insurrection.

Greek govs are not well noted for following through on tough promises so it's also possible that this time will be little different - with a fig leaf of austerity hiding a further dose of 'Euofudge'.

Will Mr Market test everyone's resolve?
Bet on it.

Only remaining question is: Who's next in the firing line?
One of the other PIIGS? Or a bear raid on the dear old pound in view of a likely continuation of unsustainable economics?

It's quiet at the moment, but that won't last long.

alexjbrandt

March 03, 2010 at 07:56 AM ET

I have to agree with your overall analysis, the markets will always win. Countries that are running huge deficits and debt loads should be taking notes, and start implementing measures so the same thing doesn't happen to them.

As for the pound, I think that the sell off is more likely a result of political unease and the possible M&A flow from Prudential's deal with AIG. (the latest being that it might not go through now due to Prudential's stock value falling)

Greece has threatened to go to the IMF if they don't get a deal from the EU. It will be interesting to see how this poker game turns out.

wwwin

March 03, 2010 at 10:23 AM ET

Well short term it looks good...but this is bad for the economy...you raise taxes, stop pension payments and reduced salaries = all bad for the economy...long term not good....and what about Italy? You just wait for the crap to hit thefan

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.