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Greek Aid Plan Divides Euro Zone

Euro’s Credibility at Stake

The euro was introduced to global financial markets in 1999 and until recently the multi nation currency allowed the EU to compete with larger economies such as the US and Japan. For a while some nations held reserves in Euros as the US dollar fluctuated thanks to massive US deficits. The euro has been the second most widely used reserve currency after the US dollar and between its introduction in 1999 and 2008 the Euro’s share as a reserve currency grew from 17.9% to 26.5%. Recently the US dollar has recovered and is regaining its status and clout as a global reserve currency. Unfortunately some euro zone nations chose to live beyond their means most notable Greece. Investors fear that Greece’s problems will spread to other EU nations such as Portugal, Spain, Ireland and Italy. To maintain the euro’s credibility as a currency EU nations must adhere to monetary regulations designed to maintain a stable euro. Greece’s massive deficits are contrary to euro zone rules and threaten the stability of the euro and have also caused a political rift in the EU.

Greece May Turn to IMF For Aid

Greece is seeking help from the EU but many are speculating that help from the multi nation currency bloc may not be forthcoming. German opposition to EU aid for Greece has pressured the euro in global currency markets. Greek Prime Minister George Papandreou said that severe austerity measures and structural reform demonstrates the Athens government is committed to resolving Greece’s fiscal crisis but high borrowing costs are making it difficult for Greece to meet budget goals. Papandreou stated, “We will make it, provided that our country can borrow on reasonable terms. Based on those conditions, our country is not seeking and will not seek financial aid, either from our European partners or from the IMF, which would be our last resort.”

Merkel Says IMF May be the Only Solution For Greece

Papandreou said that Greece wants a decision to be made at the EU summit next week towards establishing a financial mechanism to aid Greece if needed. Papandreou said an EU decision could reduce borrowing costs for Greece making it unnecessary for the nation to turn to the IMF for help. German opposition to EU aid for the Athens government remains fierce. German Chancellor Angela Merkel told the German Parliament that the IMF may be the only answer to Greece’s problems. Expressing investor concerns Simon Derrick of BNY Mellon Corp. in London stated, “The euro is weakening as investors are questioning whether there really is a plan to support Greece. From an investor’s perspective, do you feel comfortable, in these circumstances, being heavily invested in peripheral Europe?”

Quick Forex Tip: Interbank forex trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank forex trading, s/he must do so through the use of a broker

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LIBOR Rates Rise Despite Citigroup Bailout

Dollar Lending Rates Rise

Dollar lending rates rose on the interbank forex market despite the announcement of plans for the US government to bailout the failing Citigroup bank. The LIBOR (London Interbank Offered Rate) rate for three month loans in dollars rose slightly from 2.16% Friday to 2.17 on Monday, Nov, 24th, 2008.

Increase in LIBOR Rate

The increase in the LIBOR rate is important for the interbank forex, the financial sector, and the wider economy. The LIBOR determines rates for loans to households, and businesses. Many mortgages and student loans are tied to the LIBOR rate and can have wide ranging effects on the day to day economy. The rate increase suggests that banks are worried that other financial institutions could collapse in a chaotic global economy.

Credit Markets Frozen Despite Citigroup Bailout

Despite the US government’s agreement to inject $20 billion dollars into Citigroup and take on hundreds of billions in toxic assets credit markets remain all but frozen. While the move to rescue Citigroup boosted stock markets it did little to thaw credit markets in Europe and the US.

Euribor Rates Decrease

European Interbank Offered Rate or Euribor managed to decrease from 4.02% Friday to 3.97% on Monday. Both US and European rates remain well above the benchmarks set by central banks, 1% in the US and 3.25% in the Eurozone.

Citigroup to Give Government 8% Return

In exchange for the government’s $20 billion dollar injection Citigroup will offer an 8% dividend on preferred stock. In addition Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program. Citigroup lost 60% of its value last week as investors worried that toxic debt would turn into losses for the beleaguered bank.

Partial Nationalization

Citigroup is a major player in the interbank forex market and the failure of Citigroup would be catastrophic for markets in the US and abroad. Citigroup now joins other banks that have been essentially partially nationalized, a move that a year ago would have been unthinkable. It is hoped that the move by the US government will bring stability to Interbank Forex markets and provide investors with Forex opportunities.

Quick Forex Tip: Interbank fx trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank fx trading, s/he must do so through the use of a broker.

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