[ForexNews]

The EUR was unable to benefit last week from signs of easing of the Greek crisis in the CDS and bond markets. There are two key reasons for this:

The EU leaders made clear last week that financial assistance to Greece will depend crucially on the implementation of large fiscal adjustments this year and in future years. Aggressive fiscal adjustment in Greece, and potentially other countries in the future, implies much weaker growth prospects and all else being equal, is consistent with looser ECB policy. This has been reflected in the narrowing of short-term interest differentials to the detriment of the EUR.
If the market now thinks that Greece is less likely to default, this is because it has become more convinced about the EU’s willingness to bail out Greece in the worst case scenario. The market is likely to translate this willingness into greater pressure on the public finances of the core euro area countries such as Germany, in addition to the political issues it raises. This is likely to maintain pressure on the EUR.

The focus will now turn to the euro area finance ministers meeting today at 5pm, with a view to agreeing on measures to help rescue Greece if it fails to convince markets it can rein in its public finances. Investors are looking for more concrete details, as well as precision on whether the plan may include other euro periphery countries. This will not be easy as there are disagreements (for example while the ECB puts pressure on Greece for further measures, France thinks this can wait until mid-March when an official review takes place) and within Germany. It is hoped details will confirm whether euro support is in the form of a guarantee or some sort of lending facility with proportionate contributions from each country, while conditions and timing should be spelt out.

There is some disagreement across euro area countries not only on the form that any euro support should take, but also the conditions attached to such support. While yesterday evening the ECB's Trichet urged Greece to “take the extra measures that will be necessary to make credible their turnaround plan”, the Greek PM would like to delay until the 16th of March.

Germany’s support for Greece is unclear. While German Finance Minister Wolfgang Schaeuble said aid to Greece could go beyond loan guarantees, and Germany’s foreign minister, G Westerwelle (FDP) doesn’t rule out financial support for Greece, the majority of Germans, according to Bild, is of the opinion to get Greece out of the currency union if the country endangers the stability of the euro. As well, Germany’s coalition partner FDP is strictly against any bail-out of Greece, according to FDP MP Frank Schaeffler. In fact, Mr Schaeffler is criticising that German chancellor Angela Merkel (CDU) has indicated EU (including German) financial support for Greece without having consulted the heads of the CDU/CSU and FDP in the Bundestag.