While European stock markets are taking recent jitters about European support for Greece in stride, concerns are bubbling up in the foreign-exchange and credit markets. The euro is down 0.3% against the U.S. dollar to $1.3578, after falling about 1% yesterday from a height of $1.3740 and briefly crossing beneath the $1.35 level. The last time Europe’s common currency ended a New York trading session below $1.35 was May 2009.
Meanwhile, traders in the credit-default swaps market are again bidding up the price of government debt insurance as uncertainty mounts over the nature of any Greek financial-rescue plan. The cost of insuring against a Greek government debt default for five years is now about $322,000 a year compared with $316,000 yesterday and below $300,000 earlier this week, according to data provider CMA DataVision. (Greece insurance costs are still below the $350,000 to $425,000 range they occupied throughout February when Greece debt woes were center stage.) Credit insurance costs for Portugal and Spain are also slightly higher.
The reason for the ruckus: With German officials now seeming to change gears and be more open to involvement by the International Monetary Fund in any emergency Greece rescue plan, investors and analysts are worried about the impact on the broader euro-zone. IMF involvement could, like some European countries fear, be a major embarrassment that weakens the long-term credibility of the euro. Still, it may be premature to be too bearish: While the euro isn’t out of the woods yet, the end-game for Greece could be in the wings.
“The sudden German turn-around caught markets off guard,” analysts at Italian bank UniCredit say. They add, however, that “we think the short-term risks are limited, as financial support will most likely be pledged soon by either the (European Union) or the IMF.” Next week’s European Union summit could therefore be pivotal.
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