Back in 1999 the Bundesbank was wary about allowing less well fiscally managed countries into EMU.  However, political will overwhelmed economic reservations and EMU was formed.  Today, BBK President Weber has admitted that in view of the path that was chosen back in 1999 that there is now no alternative but to help Greece.  In one way or another it has become inevitable that Germany will have to pay.  The crux of the matter lies with the fact that Greece, Spain and Portugal, amongst other are far less competitive than Germany.  Yet they operate with the same exchange rate.  These countries need to address this and effectively create an internal devaluation.  This means that wages will have to be reduced.  This process is painful and may take years.  There is no yet evidence that this goal is achievable particularly given the constraints of a fixed exchange rate, but cheap loans from Germany (and other EU countries) will smooth the way.  If Germany were to refuse to pay it would accelerate a breakup of EMU or an alteration of membership.  Without Greece et al in EMU, Germany's exchange rate would also certainly rise.  Since the German economy is dependent on exports, it would still be paying albeit in a different way.  It was never  going to be easy to run a monetary union without strong fiscal controls, given that the Greece debt crisis has opened the markets eyes to the inherence flaws of EMU the EUR is likely to remains a weakened currency for some time.  If Germany coughs up the necessary funds to allow EMU to muddle through, the prize will be a softer exchange rate.  Germany's parliament is due to debate a Greek loan next week.  

Decent earnings data has helped support sentiment this morning despite the ongoing crisis in Greece.  EUR/USD has steered away from its recent lows pushing higher towards USD1.3260.  Yields on 10 yr Greek yields have fallen back to 9.01% this morning reflecting the increase in the estimates for the EU/IMF loan package which are circulating.  That said yesterday's downgrade of Spain's credit rating has heightened fears that contagion will spread potentially resulting in Spain and Portugal needing financial support.  These fears are being played down by the authorities at present.  Portugal has been planning a bond issue sometime in Q2.  This could be a big test of market sentiment.  

Cable has fared a little better this morning largely on the back of the slightly softer USD. With just one week to go before the UK general election and with the focus of tonight's televised election debate due to be economic policy, markets are returned their attention to the fiscal horrors of the UK economies.  Budget austerity is inevitable after the election; the issues surround where the cosh will fall and how quickly this will happen.  Sterling's more stable tone in recent week suggests an acceptance by the markets that hung parliament or not, the process of unwinding the fiscal deficit will be the dominant theme of any government.  Post election bickering or faltering economic recovery could still weaken the pound further, but with so much bad news already in the price it is still likely that sterling has already printed its lows for the year vs both the USD and the EUR.  UK house price data this morning rose a better than expected 10.5% y/y in Apr.

The Japanese markets were closed overnight.  The NZD softened as the RBNZ removed its pledge to start hiking rates and removing stimulus from midyear.  This afternoon US initial claims and the Chicago Fed National Activity index are due.   Jane FoleyResearch 207 398 5024