Euro Pulls Back From Early Gains

The euro pulled back from early gains after the Greek debt auction showed that investors demand high yields to hold Greek debt. Greece easily sold its issue of 6 and 12-month T-Bills and raised about 1.56 billion euros. High borrowing costs have made it difficult for Greece to manage its massive deficit. The high premium demanded by investors makes it likely that Greece will need additional financial aid. On Monday the euro rose  near a one month high of $1.3691 after EU finance ministers agreed on an aid package for Greece but fell as investors sought clarification about the aid plan. Marc Chandler, of Brown Brothers Harriman stated, “With the Greek bill auction behind it, the market may lack a clear focus, but sentiment towards the euro remains poor, even though there had been some short-covering in the futures market in the most recent reporting week.”  Despite the successful auction of Greek debt investors remained concerned about the yield Greece has to pay and some believe borrowing costs for Greece are not sustainable. Audrey Childe-Freeman also of Brown Brothers Harriman stated, “The higher yield confirmed the high risk premium demanded for Greek assets and that has put the euro bears in a stronger position. The euro was already showing signs of fatigue.”

Greek Finance Minister Says Greece Will Stick With Market Based Funding

Despite the sale of Greek t bills many investors believe that at some point Greece will be forced to seek outside aid. Greece sold 1.56 billion Euros of 6-month and 1-year treasury bills which may fill short term needs for the debt ridden nation. Analysts say that Greece faces a long hard road to recovery. Ben May of Capital Economics stated, “Today’s successful Greek short-term debt auctions will further ease fears about Greece meeting its near-term financing needs, but it still faces an uphill struggle to return the public finances to a sustainable position.”

Greece to Reduce Public Sector Debt by One Third

The Athens government is trying to reduce the public sector deficit by about a third to 8.7% of GDP but high borrowing costs and an economic contraction of 2% may make achieving that goal difficult. Greek Finance Minister George Papaconstantinou said that Greece will not ask for outside aid and will stay with its plan of market based funding. Papaconstantinou told the Greek Parliament, “We are sticking to our target and I believe we will continue to borrow from markets smoothly, as we did today with the T-bills. The Greek government has not asked for the mechanism to be activated, although it remains available if needed.”