Although the Greek bailout finally came this weekend, it failed to reassure the markets as policy-makers had hoped. Equity markets traded lower in both Europe and Asia while the EURUSD dropped nearly 150 points due to the news and reduced liquidity. The multi-year rescue package totaled €110bn - with the EU pledging €80bn and the remaining €30bn by the IMF. Although good news for Greece, the bailout funds did come with strings attached. Among them, a higher sales tax will be levied on selected goods while the Greek retirement age has been effectively raised from 53 to 67. The EU will conduct quarterly reviews of Greek finances to ensure proper fiscal management and that its economic obligations are being fulfilled. General opinion expected a bailout approved by Greece to be a positive for risky assets, but clearly global markets still hold their reservations. In the near term, there are three primary concerns. First, there is a real fear that an EU nation, namely Germany, will not garner the parliamentary support for a yes vote. Germany's opposition party has publically voiced its support for the bailout, but only under strict fiscal requirements. The 2nd concern is the lending rate the EU/IMF will require for the emergency loans to Greece. The 5% rate initially agreed upon is no longer satisfactory for a few EU member states, specifically Portugal or Spain. However, EU Commissioner Rehn did affirm that there will be no change to bi-lateral loan rates and figures would remain around 5%. Lastly, one must remain cautious on Greek Prime Minister Papandreou's tenure in office. While he currently enjoys a healthy approval rating, opposition is mounting and could derail his financial measures in the months to come. While EU officials are purposely sounding optimistic, there are still considerable risks in the EU economic system. We suspect a positive German vote will generate a sharp, short-term EURUSD rally. However, any rally will ultimately be brief as indicated by the rapid increase in short EUR future contracts on the CME from 71k to 89k. Medium-term, we are decidedly bearing on the Euro. Over a slightly longer term, we are concerned that the fiscal measures imposed on Greece will lead to weaker growth and potentially set the stage for Greece to miss the recovery benchmarks set by the EU and IMF.
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