While you were sleeping: Euro gains as Greece offers to buy back bonds

Tuesday 4th December 2012

The euro rose to a six-week high against the dollar after Greece offered to buy back 10 billion euros of bonds in what's seen as a sign of progress in tackling its debt mountain.

As talks in Washington aimed at averting the fiscal cliff appear stalled, a chink of light has flowed into markets from Europe.

The euro traded recently at $1.3065 from $1.3006 in late New York trading on Friday. The Dollar Index, which tracks the greenback against six major currencies, fell to 79.819, the lowest since late October.

Greece's Public Debt Management Agency is offering a maximum purchase price of 34.1 percent for bonds maturing from 2023 to 2042, higher than expected. Greek bonds rose on the news, pushing the 10-year yield below 15 percent for the first time since March. The February 2023 bond price is at 39.31 percent of face value, according to Bloomberg.

The buyback will be via a swap into six- month bills from the European Financial Stability Facility, which last week had its provisional debt rating cut to (P)Aa1 from (P)Aaa with a negative outlook by Moody's Investors Service. It is part of plans to reduce Greece's debt to 124 percent of gross domestic product by 2020.

The buyback was one of the conditions of the financial aid approved by euro zone finance ministers and the International Monetary Fund last week and comes as German Chancellor Angela Merkel appears to be softening her stance on conditions for a bailout, saying her country may accept a write-off of Greek debt.

"If Greece one day can rely once again on its own revenue, without having to borrow, then we'll have to look at this situation and make an evaluation," Merkel said in an interview with Germany's Bild newspaper.

Equity markets were generally higher in Europe though they pared gains after an unexpectedly weak US manufacturing report. The Stoxx Europe 600 Index rose 0.1 percent, Germany's DAX 30 climbed 0.4 percent and France's CAC 40 rose 0.3 percent.

"If Greece can manage the buyback and get a new tranche of aid, then the Greece problem will be out of the way until the end of 2013," Philippe Gijsels, head of fixed-income research at BNP Paribas Fortis in Brussels, told Bloomberg.

Manufacturing in the U.S. unexpectedly contracted last month. The Institute for Supply Management's factory index fell to a three-year low of 49.5 in November from 51.7 in October, surprising economists who had expected manufacturing to expand. Manufacturing in the euro zone was also weaker, shrinking for a 16th straight month for a reading of 46.2.

Stocks on Wall Street weakened after the manufacturing data. The Dow Jones Industrial Average was recently 0.3 percent lower, with manufacturers such as DuPont and General Electric leading the decline. The Standard & Poor's 500 Index was down 0.1 percent.

Adding to America's economic woes, Fitch Ratings said warned that the US$607 billion of tax increases and federal spending cuts that kick in on Jan. 1 are the biggest threat to the credit rating of US states in 2013.

"The risk that the fiscal cliff presents to the overall economy is the biggest concern for state credit, as state revenue systems quickly reflect changing economic conditions," Fitch managing director Laura Porter said in a statement yesterday.

U.S. Treasury Secretary Timothy Geithner told CNN's State of the Union that Republicans will "own the responsibility for the damage" to the US economy if they don't cede ground and agree to tax hikes for the wealthiest Americans.

BusinessDesk.co.nz

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