The good news for Greece over the weekend has been poorly received by the FX market. On Sunday, European finance ministers and the IMF announced a record 110 billion Euro rescue package over a three-year period intended to bail-out the debt-stricken Mediterranean nation. Effectively Greece will now not have to borrow at market rates to meet its May 19 deadline for debt repayments, which should be a relief to many Greek debt-holders. The turning-point has come after German Chancellor Angela Merkel has agreed to support the deal and fight for it in the German parliament where she needs opposition support to approve her 22 billion Euro pledge. In a statement, Merkel underlined the severe austerity program that the Greek government has agreed to undertake, and stressed the need to stabilize confidence in the Euro. After weeks of hesitancy and debate, Germany and other European nations are realizing the market's ultimatum that they address the issue head-on, or suffer a collapse in investor confidence in the their currency and the debt of PIIGS nations.

However as has been clear from the sell-off of the Euro in the Asian session, the market has made a classic 'buy the rumor and sell the fact' move. So why haven't markets reacted with more confidence now that the long-awaited bail-out has arrived? Commentators point to the fact that Merkel faces a significant hurdle in getting the Germany contribution approved as polls show considerable opposition in the electorate ahead of local elections on May 9. In parallel to this, the ability of the Greek government to push through tough reforms is being doubted, and added to that is skepticism that countries like Spain and Portugal will be able to avoid the fate of Greece. There are dire predictions that if this package fails to calm investor fears, the cost to Europe of bailing out other PIIGS nations could run above half a trillion Euro.

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