Euro at 10-month dollar low on Portugal downgrade, talk mounts that IMF will help Greece

Euro at 10-month dollar low on Portugal downgrade

LONDON — The euro slid to a ten-month low Wednesday amid mounting concerns that the International Monetary Fund will play a pivotal role in any bailout of Greece. The news that Portugal’s debt has been downgraded by one of the world’s leading credit rating agencies fueled investor concerns about the government debt woes afflicting Europe and its shared currency.

By mid afternoon London time, the euro was down 1.2 percent at $1.3341, just above an earlier low of $1.3329, which was its lowest level since May last year. The pound 0.4 percent lower at $1.4981.

Fears that the Greek debt crisis will spread have been the main focus of attention in the markets after Fitch Ratings downgraded its view on Portugal’s debt amid growing concerns about the government’s ability to service its borrowings.

“A break of the Greek ring fence and a subsequent spill over into Iberia will take the euro significantly lower,” said Hans Redeker, global head of foreign exchange strategy at BNP Paribas.

Those contagion fears came on top of concerns that the Washington-DC based IMF will play a substantial role in helping Greece get a grip on its public finances fund — underlining eurozone governments’ inability 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 the German government’s increasing reluctance to bail out Greece amid domestic opposition 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 euro20 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.

Growth concerns were at the center of Fitch’s downgrade about Portugal — it warned that the country’s prospects for recovery are weaker than its peers in the eurozone.

Despite Fitch’s one-notch downgrade to AA-, Portugal’s debt is still considered investment grade, though Fitch says the outlook remains negative.

Fitch said 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 after the pre-election budget statement from finance minister Alistair Darling.

Given the budget was six weeks ahead of the likely May 6 general election, there were few new measures announced to cut Britain’s borrowing. Though Darling said the deficits over the coming few years will be lower than previously projected, most analysts think that the next government — of whatever color — will have to unveil spending cuts and tax increases.

Jane Foley, research director at Forex.com, warned that Britain faced the “same fate” as Portugal “if the budget is not repaired” some time after the general election.

Meanwhile, the dollar was 1.6 percent higher on the day at 91.86 yen.