Sterling climbed against the euro yesterday after Greek voters overwhelmingly rejected terms of a rescue package, boosting safe-haven flows into Britain’s bonds and currency. There was no sense of panic selling in the euro, amid expectations the European Central Bank would take policy action to stabilize the market if necessary and hold emergency funding to Greek banks at the same level as last week. But the common currency, which edged up from lows after the resignation of Greek Finance Minister Yanis Varoufakis, was still a sell on rallies, traders said. Against the dollar, sterling edged 0.1 per cent lower to $1.5549, with traders gearing up for a budget statement later this week which is likely to lead to further fiscal tightening in Britain.
The “No” vote in Greece’s referendum on Sunday dramatically increases the risk of a slide towards a disorderly Greek exit from the euro zone, Fitch Ratings said. An agreement between Greece and its official creditors remains possible, but time is short and the risk of policy missteps, or that the two sides simply cannot agree a deal, is high. The resignation of Finance Minister Yannis Varoufakis signals the Greek government’s desire to re-engage with its official creditors, from whom stronger commitments on debt relief may be forthcoming following the expiry of the EFSF programme last week. But assuming they return to the negotiating table, the creditors are unlikely to make large concessions on policy conditionality up front. Their proposals may still be unacceptable to a Greek government emboldened by the referendum outcome. Solvency concerns may also make it difficult for the ECB to justify an increase in Emergency Liquidity Assistance (ELA), which has not been increased since 28 June, although it may identify an interim way of providing Greek banks with additional liquidity while negotiations continue. Without new funding, Greek banks may have to reduce the minimum daily deposit withdrawals below the €60 permitted under current capital controls.
The dollar was slightly higher against the yen and the euro in early morning trade as investors avoided making big moves ahead of Athens’ presentation of bailout proposals at an emergency summit in Brussels later in the day. After Greece’s vote on Sunday to reject its international creditors’ bailout conditions, investors will be keenly awaiting news from a planned summit scheduled for Tuesday evening. German Chancellor Angel Merkel and French President Francois Hollande on Monday called on Greece to craft urgent proposals to prevent an exit from the euro zone.