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Greek bailout fears resurface

Forex Analysis - 26th July 2012

Written by Imran Allana


The Euro debt crisis has been the focus of many investment decisions for some time now and is again hitting the headlines after inspectors from the three bodies that make up the Troika; the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Commission, visited Greece on Tuesday. Their visit was to decide whether to maintain the bailout of Greece by way of a 130 billion euro lifeline.

Greece was in somewhat of a political limbo for about three months after two inconclusive elections and fierce opposition to austerity measures have caused the country to fall behind targets set as conditions of its bailout agreement. This has again caused many to raise the idea of Greece leaving the European Monetary Union (EMU). Ideas have floated around since late last year which could result in Greece staying in the EMU without additional funding. This could involve a write-down of the 200 billion euro of Greek debt still held by private investors. Although this idea was merely chatter last year it has gained more gravitas since Tuesday’s release of an IMF paper recommending such action. More recently, an idea was floated by ECB member Nowotny to grant the European Stability Mechanism (ESM) a banking licence. This would allow the ESM to participate in the ECB’s liquidity operations, leveraging itself to a level where it could exchange the bonds it has bought to support highly indebted countries with fresh cash without additional government funds required to support the euro.

On Tuesday EUR/USD hit a two year low of 1.2035 and some analysts have speculated that the short euro trade may be overcrowded and that the pair may now have some scope to move higher, possibly back above the 1.2400 area. With the Troika due to visit Athens again in September, Greek financing needs will have to be covered over the month of August, but there has been no indication on how this will be arranged.

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