The ability of the EUR to turn a blind eye to the repeated failures of Greece to commit to the terms of its bailout is firm evidence of the reduction in risk aversion since the end of last year.  There are a few reasons for this though clearly the ECB’s huge liquidity add appears to be principally responsible. 

After all, there is no longer any reason to fear that a Eurozone bank will collapse just due to lack of liquidity.  With the banks better positioned one arm of the Sovereign Debt crisis has certainty improved.  That said banks are still vulnerable to contagion risk and there is still a huge amount of ground to be covered on the political front. 

At the end of last year politicians did seem to properly take on board the risks associated with contagion.  Merkel reported that she had been poorly advised when she insisted that private sector bond holders take a hit on Greece debt. Since then politicians are been keen to stress that the private sector will be taking no haircuts in respect to any other EZ country – politicians appeared to realise that the private sector are  instrumental in allowing them to run budget deficits.   

This week there is increased talk that holder of Greek debt that are due to be repaid on March 20 may still be paid from bail-out funds even if the money due to flow into the main account of the Greek government is withheld. 

This is not confirmed but it would be a big step in reducing contagion risks and could help contain peripheral debt yields further.  Near-term a break of the EUR/USD1.3290 projection levels could see higher to the 100 day sma at USD1.3336.  On a 3 month view we continue to see scope for pullbacks based on political risk.


source: Rabobank