Greece’s fiscal deficit is a problem that will not go away, it seems that every summit and agreement just leads to more issues down the line. The response from the EU has been lacklustre, and uncertain, with a lack of clarity on when it could be used, how much it would be for, and what financial restrictions it would impose on Greece. As the EU, and Germany in particular, have dragged their feet on a bailout Greece have been paying more and more to roll over their debt, while the other EU nations with fiscal problems have been getting drawn into the crisis. Yesterday saw another deepening of the crisis, as Standard and Poor downgraded Greece’s debt rating to junk status, and possibly more damagingly, downgraded Portugal by more than expected to A-. The downgrade caused another bout of risk aversion, which weighed heavily on European stocks and the Euro. The single currency has slipped to below 1.32 against the Dollar near a one year low, but the Pound has not managed to make much headway. staying just above 1.15 against the Euro. The EU have responded in the usual bureaucratic fashion, calling another summit, and not anytime soon either, as it is scheduled for the 10th of May. There is a reason for the delay, as on the 9th of May Germany hold local elections, and with the German electorate not behind any bailout, it may take a summit without the pressure of the upcoming election to allow the German government to essentially ignore the wishes of their voters and get something in place.
The signs are that the problems are spreading from Greece to other European nations and this has weighed on markets globally, with stock markets not only falling in Europe but also in the US. As risk aversion increased, the Dollar has risen pushing the Pound down to below 1.5250. The Pound has fallen over 2c against the Dollar in the last few days, and this has been partly blamed in the press on the prospects for a hung parliament, even though the latest polls actually show the Conservatives with a slightly larger lead, and some polls give them a lead that would result in a majority and allow them to form a government. Although the polls seem to have swung at least some way towards the Conservatives the Pound has not managed to any benefit, and as the markets watch the horror show across in the EU, the Pound may not get much support as the markets are reminded of our own fiscal problems.
There is no data out for the UK today, and nothing for the EU either, although with the state of the Greek finances dominating the markets, any release would have been largely ignored anyway. The markets will react to the vagaries of the seemingly endless unfolding of the Greek crisis throughout today, but this evening there could be a circuit breaker in the form of the latest FOMC decision. There has been some rumours that the fed will change the wording on their statement to indicate a rate rise, which some expect towards the end of the year, but it is more likely that the statement will reiterate their commitment to low rates for an extended period, which may improve risk appetite, at least until the next episode of the Greek crisis.