Euro exchange rates advance as Greek govt formation looms, but how can the EU help the new Greek government out?

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Category: Exchange Rates

Published on Wednesday, 20 June 2012 11:32

Written by Sam Coventry

Deutsche Bank believe new incentives will be offered to Greece in order to chart a way forward for the economy.

Good news for the Eurozone, and of course the euro (Currency:EUR) is that the Greek's are approaching agreement on the formation of a government.

The head of the small Greek Democratic Left party says he expects a deal later on Wednesday on a new coalition government, which he will support.



The euro dollar exchange rate is 0.14 pct up on yesterday at 1.2703.

The euro to pound exchange rate is 0.06 pct up at 0.8072. (Latest pound euro forecasts on our IMT site, access Free via this Facebook entrance path).

Looking ahead, how will the new government tackle the austerity programme, and importantly, how will European leaders assist Greece?

"In our view, a fundamental alteration of the program or providing another aid package to Greece would be off the table. However, incentives can be offered via two options: a) reduction in interest rate charged on official sector loans to Greece which may enable it to delay its fiscal adjustment program and b) pro growth measures via project bonds," says a note from Deutsche Bank on the matter.

The official sector loan to Greece is in three tranches: EU loans from the first Greek package, which currently are set at an interest rate of Euribor + 150 bp (already reduced from Euribor + 300p), the new EFSF loans which are provided at a rate which includes the EFSF funding rate and administrative costs and IMF loans.

In terms of practical implementations, Deutsche Bank believe a reduction of interest rate on the EU loans is feasible, potentially to Libor flat, thus providing a relief of EUR 0.8bn per year to Greece.

A reduction in interest rates on the IMF loans would be difficult to engineer and hence we do not view it as a policy option.

"On the EFSF loans, a reduction in interest rates also faces practical hurdles as providing loans below the funding cost would de facto imply calling upon the guarantees of the member states. However, a step up function of interest rates which provides near term relief to Greece with higher interest payments in the future could potentially be debated.

"In addition, pro-growth measures currently being debated in Europe, including the use of project bonds and infrastructure projects can be added as incentives for Greece to continue delivering on structural reforms," say Deutsche Bank.