Focus FX Monthly
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3 Noiembrie 2011 |
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RAIFFEISEN BANK S.A. |
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011857 Bucureşti, Sector 1
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www.raiffeisen.ro
EUR/USD
EUR/USD: 1.375 - 1.30 (December)
Following the completely unexpected announcement by Greek Prime Minister Papandreou on Monday evening that he intends to hold a binding referendum to approve the decisions reached at the summit on 26 October, it seems that political chaos has taken hold in Athens. Since then, additional MPs have defected in protest of Papandreou's plans. As a result, the likelihood of him surviving the confidence vote scheduled for Friday night has fallen further, as his majority in parliament has diminished to a maximum of just two seats. How the political situation in Greece will unfold in the coming months is impossible to predict: It seems that anything is possible, from a continuation of the current government (referendum around the end of the year) to new elections (at the earliest four weeks after they have been called) and even a government of national unity that is not led by Papandreou (most likely no referendum).
However, all of these alternatives are problematic: If the majority of Greece’s population were actually to vote “No” in a referendum, a chaotic national bankruptcy would be virtually unavoidable. In this case, no further aid would come from the EU, the Eurozone countries or the IMF. It would then be verylikely that Greece would withdraw from the EU andreintroduce the drachma. The consequences of this for Greece (a massive decline in the standard of living, hyperinflation, social unrest) and for the rest of the Eurozone (contagion effects on other peripheral countries with the possibility of bank runs and additional cases of national insolvency as well as a deep recession even in the core of the Eurozone) would be devastating. But new elections are also problematic.
The ruling party, PASOK, and the largest opposition party, Nea Dimokratia, currently hold a comfortable parliamentary majority of roughly 80% altogether. According to the latest surveys, however, the two parties together would only receive around 37% of the votes. In contrast, the right- and left-wing fringe parties would see solid gains. This would make it extremely difficult to form a government because the two largest parties would no longer hold a majority in parliament together. In light of this uncertainty, the timely implementation of the summit decisions is in dire peril. Without any fresh money, however, Greece could go bankrupt by the end of the year. At the crisis summit today in Cannes, Germany, France, the EU, the ECB and the IMF hope to come to an agreement about how to proceed. Although the euro has reacted negatively to the latest developments, its reaction was surprisingly mild. The common currency lost just 3.5 cents at its worst, falling from EUR/USD 1.40 to EUR/USD 1.365. The exchange rate is now back to EUR/USD 1.377.
There appears to be a high level of confidence on the markets that the crisis in Greece will be resolved quickly. However, we are less confident and are expecting the bickering to drag on longer. A very negative result, for example, would be for Papandreou to be voted down on Friday and for new elections to be called. We are therefore sticking to our forecast that the euro will be worth less versus the dollar at the end of the year than it is now. Until then, however, developments will remain volatile. Today's FOMC interest rate decision, for example, poses an event risk. Following numerous indications by members of the Fed that further monetary policy measures are likely to come sooner or later, a number of market participants have started to speculate that Fed chief Bernanke will announce these measures at today's press conference. This would drag down the dollar. However, we do not anticipate that such measures will be announced today.
