Monday, 13 July 2015

Greek Bailout – why has Pound/Euro risen?

Monday 13th July 2015
It was quite an eventful weekend for Greece and the Eurozone, with late night negotiations resulting in an announcement this morning that a deal has been made. If that’s the case, then why hasn’t the Euro strengthened? 

As you can see from the chart below, when markets opened this morning and reacted to the news, rates actually rose from €1.39 to €1.4050. As is often the case in the currency markets, the devil is in the detail, and in a moment I’ll explain why all is not as it seems and look at why Pound/Euro rates are still high. 



Greece makes deal, but Euro remains weak for now

The facts are as follows: Athens has been offered a third bailout, and this means the country will avoid bankruptcy. Greece will stay inside the euro and there will not be a 'Grexit'. However, it’s not quite yet a done deal. 

A proposal is on the table, however Greek Prime Minister Alexis Tsipras now has to rush through key measures on pension reforms, tax increases and a debt repayment, all of which needs to be approved by parliament by Wednesday, and only then will bridging loans be agreed to enable Greece to meet a payment to the European Central Bank in a weeks time. 

Eurozone finance ministers are due to meet later today to talk about some emergency lending to help Greece over the next few days. 

Some investors say even if a final deal is agreed, the lasting damage done to the Greek economy could still sour attitudes towards the currency union in the longer term. The tough conditions imposed by international lenders may also cause an outcry in Greece and bring down Tsipras' leftist government. Even before the final terms were known, his labour minister went on state television to denounce the terms. So it's not quite over yet, and while uncertainty remains, the Euro remains weak.

Summary 

So a deal is done. Sort of. But we have to wait until Wednesday to see if it will actually be carried through. The Greek parliament still need to agree to the terms, and the EU still need to discuss emergency funding, and until then capital controls are still in place and the Greek banks are almost out of cash. 

This is the reason the Euro is still weak and GBP/EUR rates are still holding above €1.40, while the final hurdles are negotiated in Greece and Europe. I will post regular updates on the blog throughout the week with the latest developments and t he effect on Pound/Euro rates. 

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