Greece Granted Two Year Extensions But Risk Aversion Continues

Greece Granted Two Year Extensions But Risk Aversion Continues

Yen and dollar strengthened broadly in Asian session today on risk aversion. Asian indicates opened mixed following a flat close in DOW overnight, but quickly turned all red on another round of selloff. Greece was quoted as a reason for the weakness. But it should be noted that even though the release of next tranche of bailout funds was postponed to November 20, this should be well expected and priced in. Meanwhile, the granting of a two year extension to for Greece's fiscal adjustment should actually be taken as a positive. So, it's believed that, on the other hand, the concern on US fiscal cliff is the major driving force behind the current selloff. There are risks that unresolution of the fiscal cliff, which would then trigger a series of budget cuts and tax hikes, would drag US and then the world back into recession. This would remain at least a temporary negative factor to market sentiments.

After the meeting in Brussels yesterday, Eurozone finance ministers agreed to Greece another two years, until 2016, to lower the deficit to 2% of GDP target. Also the debt level is targeted to be brought down to 120% of GDP until 2022. Luxembourg prime minister Juncker hailed that "Greece has done a big part of what it was supposed to do, adopted an ambitious reform program and a budget for 2013 that's impressive". However IMF managing director Lagarde openly said she has "different views" with EU finance chiefs and believed that "debt sustainability of Greece has to be measured in 2020."