Euro at 10-month dollar low amid mounting talk of IMF involvement in Greek debt crisis

Euro at 10-month dollar low amid Greek IMF talk

LONDON — The euro slid to a ten-month low Wednesday amid mounting expectations that the International Monetary Fund will play a central role in any financial package for Greece and the news that Portuguese debt has been downgraded by one of the world’s leading credit rating agencies.

The British pound also took a knock ahead of a key budget statement from the government.

By midmorning London time, the euro was down 1 percent at $1.3355, just above an earlier low of $1.3345, which was its lowest level since May last year. The pound 0.4 percent lower at $1.4981.

While participation by the Washington-DC based fund may help Greece borrow money at a cheaper rate than it has been able to recently, it would also highlight the inability of eurozone governments to deal with the Greek debt crisis on their own.

For weeks, it seemed that the eurozone was adamant that it would not look for outside help regarding Greece’s debt crisis. But Germany’s increasing reluctance to bail out Greece has increased the likelihood that the IMF would be called in.

“The euro area has lost some credibility on that front and the communication cacophony around the whole negotiation process contributed to it,” said Jacques Cailloux, an analyst at Royal Bank of Scotland.

Thursday will likely be the next key date in the seemingly never-ending Greek crisis, as the 16 leaders of the countries using the euro are expected to meet in Brussels.

Greek Prime Minister George Papandreou has repeatedly said he has no qualms in calling in the IMF to provide some sort of backstop so that Greece can borrow at affordable interest rates as it tries to deal with its mountain of debt.

“With Germany seemingly digging in its heels with regard to a support package for Greece, it looks unlikely that the summit will generate any concrete EU plans that will sufficient to assuage market nerves,” said Stuart Bennett, senior foreign exchange strategist at Credit Agricole.

“Instead it seems that the Germans and the French — if speculation is to be believed — both agree that the IMF should be involved in any support,” he added.

Greece has around €20 billion of debt maturing over the next couple of months and wants to avoid paying sky-high premiums demanded by investors as compensation for the added risk of holding shaky Greek debt. A financial backstop would relieve fears about Greece’s ability to pay and lower those rates.

At the moment, the spread between Greek and German 10-year bond yields stands at over 3 percentage points, meaning that Greece has to pay interest in excess of 6 percent just to get investors to lend it the cash.

That’s unsustainable in the long run. Although the Greek government has said it can wait until the end of April to borrow more money, its economic situation is dire — the Bank of Greece estimates the economy will contract by 2 percent this year, more than previously expected.

Further weighing on the euro was the announcement from Fitch Ratings that it was downgrading Portugal’s sovereign debt amid growing concerns about the government’s ability to service its borrowings.

Fitch said that Portugal’s prospects for recovery are weaker than its peers in the eurozone, adding that this will put pressure on public finances over the medium term.

As a result, the agency has lowered its rating on the country by one notch to AA-. Despite the downgrade, Portugal’s debt is still considered investment grade, though Fitch says the outlook remains negative.

Fitch says the Portuguese government has to implement “sizeable” budget measures to meet its target of getting its deficit to 3 percent of national output by 2013.

Elsewhere, the British pound was foundering too ahead of the pre-election budget statement from finance minister Alistair Darling. Given that the statement is six weeks ahead of the widely anticipated general election date of May 6, analysts doubt anything substantial to deal with Britain’s own ballooning debt will be announced.

“We believe that Darling is most unlikely to furnish the City with the detailed spending projections that many see as a prerequisite for the government’s plans for fiscal retrenchment to be taken seriously,” said Neil Mellor, currency strategist at Bank of New York Mellon, referring to London’s financial district.

Meanwhile, the dollar was 0.8 percent higher on the day at 91.21 yen.