It has been a wild ride for the EUR/USD this morning with the vocal opposition to the Greek Austerity Package and the escalating violence on the streets in Athens causing significant volatility for the currency. When the voting began and the initial results were being tallied, the EUR/USD fell nearly 100 pips only to recover those losses seconds later. The price action at the time reflected nervousness amongst investors about the potential outcome of the vote and at the end of the day, even though the package was passed, it was not enough because the EUR/USD failed to extend its gains.
Nonetheless, Greek Prime Minister Papandreou collected enough votes to pass the Austerity package (155 vs 138). They overcame their first major hurdle when Papandreou won the confidence vote and now the second hurdle of Parliamentary approval has been cleared as well, putting Greece one step closer to receiving their next aid payment and second bailout package from the EU/IMF. Even though the EUR/USD failed to rally off the vote, the decline in Greek and Italian CDS spreads reflect relief amongst investors.
The next step is for the Greek Parliament to approve the implementation procedures, which we expect to go through smoothly tomorrow. This vote is scheduled to be completed by Thursday evening. The Greeks have lived up to their end of the bargain by passing the Austerity Package that the EU and IMF have demanded and now the ball is in their court. When European Finance Ministers meet on July 3rd, we expect them approve the next bailout tranche, worth EUR12 billion. They will then start to discuss options to ensure continued financing for Greece. Thankfully, investors are not operating in a vacuum because the bond rollover plan proposed by France has received widespread approval and support by the markets. Getting rating agencies to feel the same way will be the main challenge but crafting the second bailout package will not be easy either because even if there is enough participation in the rollover, Greece will still be asked to find buyers for EUR50 billion worth of state owned assets. We can breathe a sigh of relief today that Parliament has approved the Austerity Package which was a necessary step for European policymakers to move forward, but the sell-off in the EUR/USD after the vote suggests this is not enough.
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