Greece debt wrangling hands surprise to euro bears

[LONDON] The euro's resilience amid political brinkmanship over Greece shows how the currency union is better insulated against shocks than five years ago.

Even before euro-region leaders reached a provisional deal on extending the nation's bailout on Feb 20, the 19-nation currency was headed for its best month since November against a basket of its major peers. Strategists in a Bloomberg survey have refrained from cutting their median year-end euro-dollar forecast for almost three weeks.

"Markets looked at the brinkmanship and concluded it is in neither party's interest to take us over the edge," Sam Tuck, a senior currency strategist in Auckland at ANZ Bank New Zealand, said on Monday. "With the changes that have happened, the institutions and regulations that have been put in place, the European Union is in a better position to weather storms than it was back in 2010."

Things are different now from when Greece last faced the exit door. Banks have cut their exposure to Europe's most- indebted nation by about 80 per cent and the euro-region economy is finally showing signs of improvement.

Under the terms of last week's agreement, Greek Prime Minister Alexis Tsipras still has to convince his European counterparts he's willing to go far enough on economic reforms in return for keeping aid flowing to the country for four months.

BULLS SCARCE

While few strategists expect the euro to strengthen during the rest of 2015, they say declines are likely to be the result of higher US interest rates and massive stimulus by the European Central Bank. A potential Greek exit is a ways down the list.

Investors weren't so sanguine during the euro-region debt crisis of 2009 to 2010, when the shared currency lost about 18 per cent of its value against its Group-of-10 peers tracked by Bloomberg Correlation-Weighted Indexes. The euro has fallen less than 0.1 per cent against its counterparts since the start of February, putting it on course for its best month since it appreciated 1.1 percent in November.

Other central banks are also easing policy, limiting the euro's declines.

'UGLY PAGEANT'

"It's like the ugly beauty pageant - at this stage, who looks the least worst?" Eimear Daly, a currency strategist at Standard Chartered Plc in London, said by phone on Feb 20. "The euro zone is starting to look a bit better. Europe's survived so many crises before, it's probably a good place to put your money."

The euro has appreciated 0.8 per cent against the US currency this month, after dropping to an 11 1/2-year low of US$1.1098 on Jan 26. Standard Chartered is more optimistic than many lenders about future gains and predicts an advance to US$1.18 by Dec 31. The currency was at US$1.1376 at 2.27pm in Tokyo.

"Banks, central bankers and policy makers have had plenty of time to prepare for a potential Greek exit, so it wouldn't be nearly as dramatic as it would've been years ago," Matt Weller, an analyst at Gain Capital Holdings Inc.'s Forex.com unit, said by phone from Grand Rapids, Michigan, before the provisional agreement was announced. "That's kept the euro under wraps for the last couple weeks."

The median of more than 60 forecasts in Bloomberg's survey puts the euro more than 3 percent weaker at US$1.10 by year-end, extending an almost 6 per cent decline so far in 2015. After six straight months of cuts, contributors haven't lowered the estimate since Feb. 3.

SYRIZA MANDATE

Greece's Syriza party won the nation's Jan 25 elections, giving it a mandate to end years of austerity that have shrunk the economy by about a quarter since 2008 and left unemployment at more than 25 per cent.

For Mr Tsipras, the fight now turns to the home front, where he must sell the deal to voters. His government also needs to submit a list of economic measures it will undertake to euro- region leaders by Monday. European finance chiefs will then decide whether his proposals go far enough. Without an extension to its aid loans, Greece may run out of money as soon as March.

Not everyone is sure Greece can remain in the currency bloc. Michael Levas, founder and chief investment officer of Olympian Capital Management LLC, predicts the euro will slide to US$1 for the first time since 2002.

"I'm going to stay short-euro until I see parity," Mr Levas said by phone from New York on Feb 19, before the provisional deal was announced. A short bet is a wager an asset will fall. "Greece will definitely leave" the euro in the next two years, he said.

STAYING SHORT

Even so, most strategists agree the ECB's 1.1 trillion-euro (US$1.25 trillion) bond-purchase programme, due to start in March, is likely to be a bigger driver of the euro than Greece crashing out of the currency union.

If Greece does quit, the impact on other members may be limited. European banks' claims on Greece totaled 34.2 billion euros as of the end of October, down from more than 183 billion euros in March 2010, according to the Bank for International Settlements in Basel, Switzerland.

The European Commission raised its growth forecasts for the euro area on Feb 5, even as it lowered the inflation outlook.

Greece "won't derail the broader economic recovery that's taking place," Atul Lele, who oversees US$1.9 billion as the chief investment officer of Deltec International Group, said by phone from Nassau, Bahamas, on Feb 19. "We're looking for opportunities to increase rather than decrease" our European holdings, he said.

BLOOMBERG