Investors unconvinced by EU deal over

Greece
By Jamie Chisholm, Global Markets Commentator

Published: February 11 2010 08:54 | Last updated: February 11 2010 15:13

15:00 GMT. News that a meeting of European leaders had agreed a „deal‟ to assist Greece in
tackling its debt crisis received a fat raspberry from markets on Thursday.

The FTSE World equity index had initially risen for the third day in a row on hopes that
support for Greece would prevent sovereign debt default fears spreading through the
eurozone. A modicum of risk appetite returned, hitting the dollar, supporting the euro and
boosting commodities.

However, equity markets fell back and the euro relapsed after Herman van Rompuy, EU
president, said that an agreement had been reached to provide some form of aid.

Sceptics noted that the market had received merely talk of a deal rather than details of an
actual package. At the same time there were signs that traders were reassessing whether any
potential rescue was positive for the long-term health of the European economy, given that it
could allow difficult fiscal decisions to be shunned and may mean the debt problems were
simply spread out rather than exorcised.

“We believe that the whole „bailout‟ scenario constitutes a double-edged sword, with
assistance only serving to undermine the euro‟s interests in the long run,” said Neil Mellor at
Bank of New York Mellon.

“Put simply, „rewarding‟ Greece‟s profligacy rips the lid off a moral hazard can of worms that
was opened with the de facto abandonment of the Fiscal Stability Criteria early in the
millennium.”

● The euro relinquished mild gains, accelerating its losses as New York traders reached their
terminals. The single currency lost 0.5 per cent versus the dollar and dropped 0.8 per cent
against a yen that was itself buoyed by a haven flows as risk appetite waned.

This shift in sentiment provided support to the dollar, which rose 0.2 per cent against a basket
of its peers.

The Australian dollar jumped 1.1 per cent against the greenback after a far better than
expected employment report encouraged traders to shorten the odds on a March interest rate
rise.
● Greek government bond yields reversed early big falls to turn slightly higher as the lack of
detail on any bail-out raised concerns. Having at one stage breached 5.75 per cent the yield on
the 10-year bond was later trading up 4 basis points at 6.0 per cent.

However, the debt of the other so-called peripheral economies, such as Spain and Portugal
managed to maintain some interest – their yields dipping by several basis points.

German 10-year Bund yields fell as 1 basis point to 3.21 per cent, widening the yield spread
with Greek debt to 279 basis points.

Richard McGuire, fixed income strategist at RBC Capital Markets, said that the trade of
favouring the debt of “cyclically blessed” nations over that of the “structurally impaired” was
under threat as the core of Europe edged closer to taking on the obligations of its fiscally
hampered periphery.

“We would now favour selling Bunds against those markets whose structural impairment,
while still significant, has long been well known,” he concluded.

US 10-year government bond yields rose 2 basis points to 3.71 per cent. The Treasury will
auction $16bn of 30-year bonds later. Guy Mandy at Nomura said demand for recent US
issuance had been relatively resilient: “We expect supply to continue to find support from
here.”

● Wall Street lost ground as the dollar rallied and investors pondered the daunting prospect
that neither a Greek bail-out nor a developing debt crisis were particularly attractive
prospects. The S&P 500 lost 0.6 per cent.

European bourses succumbed. The FTSE Eurofirst 300 fell 0.4 per cent and London‟s FTSE
100 lost 0.1 per cent, with miners supporting the latter. The FTSE World index fell 0.1 per
cent.

● The Hang Seng in Hong Kong jumped 1.9 per cent, with traders citing relief that a slower
pace of consumer price inflation than forecast would allow Beijing to take a more gentle grip
on the monetary brake. Shanghai stocks were less effervescent, adding just 0.1 per cent.

“January‟s CPI surprised on the downside, rising 1.5 per cent year-on-year compared with 1.9
per cent in December,” noted Wensheng Peng at Barclays Capital. “We believe the result,
combined with a marked slowdown in bank lending in recent weeks, reduces the probability
of further policy tightening in the near term.”

The FTSE Asia-Pacific index climbed 1.1 per cent. Japan was closed for a public holiday.

● Gold bugs found the strength to dismiss a firmer dollar. The precious metal rose 0.5 per
cent to $1,077. Oil retreated from an early advance as risk appetite evaporated, losing 0.3 per
cent to $74.30. The Reuters-Jefferies CRB index, a basket of commodities, rose 0.1 per cent.