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Following a long period of giving only vague hints the Eurogroup, the Eurozone Ministers of Finance, made more concrete comments yesterday, providing more detailed information on their aid plans for Greece. The opposition of the German government against a more concrete aid offer therefore seems to have been overcome – at least partially. “Coordinated bilateral aid” is the solution, which the Eurozone countries are aiming for in case the debt crisis in Greece leads to a buyer strike. “If it became necessary Greece would get support under all circumstances“, is the message which the head of the Eurogroup Jean-Claude Juncker wanted to send to the markets. Was it a success? Hardly, measured by the market reaction. CDS spreads have not reacted measurably to the news and the euro even lost ground. The measures were introduced “in order to avert a crisis for the euro”, one commentator wrote this morning. In our view the measures agreed by the Eurogroup are more likely to constitute a burden for the European single currency. Only a complete plan, which defines not just the aid payments but also the conditions it is linked to, the control mechanisms and the sanctions to be taken in case the conditions are breached, would have the potential of causing a sustainable correction in EUR-USD. This variation, which currently constitutes the central scenario, is becoming less likely due to yesterday's agreements. As control mechanisms and sanctions are not realistically bilateral, but can only be imagined on a Eurozone level. The announcement of bilateral aid makes the establishment of these mechanisms seem less likely. The only hope that remains is the fact that the coordination of the bilateral aid payments was announced.
 

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From the point of view of USD investors today's FOMC meeting is likely to be a disappointment. It is likely to remain part of the statement again today that key rates will remain “exceptionally low for a prolonged period of time”. The disappointment of those who are hoping for this wording to be revised soon could only be avoided if a rising number of FOMC members does not like this wording. Last time Kansas City Fed governor Tom Hoenig had already voted against this wording. Should Hoenig be joined by another member this would suggest that the camp of the hawks is growing. But it is not very likely. An unchanged statement is only likely to but notable pressure on the dollar against the yen. In EUR-USD the drivers from the Eurozone (see above) are likely to continue to dominate.
 

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GBP:

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The pound fell against the euro again yesterday whilst under pressure from the U.S. Dollar. Against the background of the high budget deficit, the rating agency Moody's said that Britain was clearly at risk of losing its AAA rating. In addition, statements by Federal Reserve member Kate Barker stated that the British economy could even have a negative quarter of growth. Although they also said that they did not believe in a renewed recession in the UK, findings of how fragile the economic recovery is were confirmed, further suggesting that the expansionary monetary policy will remain for quite a while.
 

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Following a breach of the 1.45 mark EUR-CHF rapidly approached the 1.45 mark. This has made it clear to everyone that the SNB is not defending a certain level but is pursuing a policy of ”leaning against the wind“, so it only tries to reduce the speed of the appreciation. Such a policy entails the danger of attracting CHF buyers more than ever. A central bank loses if it pursues this strategy. After all it is continuously buying EUR-CHF in a falling market. And as FX markets are a zero sum game that means that the rest of the market participants make profits. The situation could become particularly precarious for the SNB once it begins to mind how much CHF liquidity it creates with the help of these interventions. In that case it would become too obvious a victim of speculative CHF buyers. The last SNB statement, in which it considered the danger of deflation to have fallen, is however pointing exactly in that direction.
 

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Markets have already digested the slightly less hawkish RBA statement at the beginning of the month – the majority of market participants expect the RBA to leave rates unchanged in April. Even though the RBA announced further rate rises it was less outspoken: “The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.” In previous statements the bank had said that “the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term”. In our view these statements are a sign that following the rapid start of the RBA's rate cycle (25bp each in October, November and December) it will now take smaller steps – a fact that it had already signalled by keeping rates unchanged in February. That is why the minutes of the meeting in early March when rates were raised to 4.0%" didn’t provide any really new information, only the confirmation that “interest rates will move gradually towards more normal levels”. Hence, we stick to our outlook for the AUD: in general we remain optimistic for AUD and see a chance that AUD-USD might once again rise towards 0.93. Following three unsuccessful tests of the 0.92 mark this is likely to be difficult though.
 

 

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The Polish rate of inflation for February came in slightly below expectations. At a yoy rate of 2.9%" the inflation target (1.5%" to 3.5%") seems easily obtainable, with the risks pointing to the downside. So no reason to raise rates for the foreseeable future? By year end the inflation development trend is likely to have reverted – also according to the central bank. But as monetary policy usually effects inflation with a time lag of several quarters, a start of the rate rise cycle in the second half of 2010 is still appropriate. Yesterday's inflation figures – and those for the following months – say very little about that. As a result this news is unlikely to have long lasting effects on EUR-PLN. The news on the budget situation is likely to more relevant and it is not PLN positive: Yesterday the IMF confirmed our view that the target of reducing the budget deficit to below 3%" of GDP by 2012 was little realistic.

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Greece Prime Minister George Papandreou said Monday his administration is committed to reforms needed to ensure a "viable" economy, but he needs support from the European Union with measures to ensure the nation will not face exorbitant borrowing costs as the result of speculation.
 
Facing rates much higher than other EU members "would be unsustainable within a common currency," Papandreou said at a joint press conference with U.S. Secretary of State Hillary Clinton.
 
"What we are saying is we do need the support of the European Union if indeed speculation does not allow us to borrow at the right rates," the official said on the first day of his three-day state visit. "We're not asking for money. We're not asking for bailouts."
 
He declined to offer specifics of the ideas under discussion but said "the European Union of course is looking at this ... the types of instruments which would be necessary if Greece does have a problem."
 
"We may never have a problem. We may go out to the market and not have a problem with high borrowing rates ... but if we do so there will be instruments which will help us deal with this type of speculation," Papandreou said.
 
He repeated his commitment to show "that we are ready to cut down our deficits and in doing so making sure those who do lend to us will be investing in a viable economy, and will be getting certain returns on their investment."
 
He and Clinton agreed on the need for the G20 to pursue financial sector regulation to ensure the types of speculation that fueled the current crisis can be prevented in future.
 
Clinton said the new regulatory regimes should look at "some of the financial instruments used to the detriment of not only Greece but other countries, including our own."

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Borrowing more and paying less may seem strange but currently, personal loans are priced in such a way that borrowing more could lead to you paying less.
 
This concept is broken down from one simple observation - the more money you borrow, the less interest you have to pay on it so it is worth shopping around. That is not to say that it is advisable to take out a loan that exceeds what you require, simply because you will be in a greater debt. However, the subtlties between some amounts are not implicated enough which means borrowers do not realise they would actually be paying back more money (including interest) on a smaller loan.
 
Moneyfacts, a financial data provider, has revealed this information using average interest prices on loans.
 
So a loan of less than £3,000 has an average rate of 19.6% whereas a loan of £3,001 and £4,999 has an average interest rate of 16.9%. Borrowing between £5,000 to £7,499 has an average interest rate of 12.4% and any more would average an interest of only 10%.
 
Taking these averages, borrowing £7,500 at 10% over three years would cost a total of £9,561. Borrowing £7,100 at 12.4% over three years would also cost £9,561.
 
In the former instance, you end up getting more for your money.
 
Borrowing £3,000 at 16.9% will cost you £3,845 over a 3 year period, the same as if you borrowed £110 less at the higher rate of 19.6 per cent.
 
Michelle Slade from Moneyfacts advises that 'When you take a loan, it's worth considering what the next rate up will be and seeing if it doesn't pay to take a little bit more. In some cases, you may actually be a little bit better off to borrow that bit extra.'
 
Last piece of advice from borrowernews.com - don't let the horrid price comparison ads put you off from using those services as they can bee quite useful. At the same time, do not take their word as gospel. If you find the best price for a loan with a certain bank take Michelle's advice and see whether borrowing more money with that bank will result in you paying less or the same.

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The quote "neither a borrower nor a lender be" should perhaps now read, "neither a saver nor a lender be".
 
It can certainly pay to be a borrower at the moment, but being a saver has been a rather joyless experience for some time now – and so it goes on. 
 
The ramifications of the financial crisis continue to play havoc with savers, and last week was yet another dismal one for those hoping to generate an income from their savings.

For starters, we learned that during the first six weeks of 2010 the average rate of the top five savings accounts fell to just 2.89pc, from 3.04pc at the turn of the year. Throw in rising inflation (likely to carry on rising for a few months) and the real return savers are getting is even less.
 
Bank Rate may have been on hold at 0.5pc for almost year now, but it hasn't stopped our banks and building societies cutting rates week after week.
 
According to Moneysupermarket.com, eight of the top 10 deals have seen their rates fall, or have been pulled entirely this year.
 
For those who used to be able to supplement their income with investment returns, there was yet more bad news. They learned that dividends from the UK's largest companies were cut by £10bn in 2009. Of the £56bn paid out, almost half was accounted for by just five stocks, so if you didn't hold shares of BP, Shell, HSBC, Vodafone or GlaxoSmithKline, then there's a good chance you would have been let down on the dividend front.
 
And any hopes savers had of an imminent rise in interest rates – or at least some upward direction by the end of the year – have been dashed by the latest inflation report from the Bank of England.
 
There is a chance, the Bank warned last week, that the economy could slip again into negative territory and that interest rates will need to remain low to keep the fragile recovery on the rails.
 
With a stuttering economy and the possibility of the double-dip recession, interest rate pundits who had been changing their tune have backtracked. Most reckon that rates will stay low well into 2010 – the Telegraph's Roger Bootle asserts they could stay below 1pc for five years. This will pile even more misery on hapless savers who have suffered next to nothing returns on their savings.
 
Given the recession and rising unemployment, many will be relieved to hear the interest forecast. Low interest rates have been the saving grace for many borrowers.
 
While a prolonged recession is obviously not good news, low interest rates are if you want to keep your roof over your head. Borrowers fortunate to be on extremely cheap standard variable rates might also be allowing themselves a wry smile. They can put the "should we switch to a fixed-rate deal before rates rise" dilemma on the back-burner for a while. Or can they?
 
It was the statement made by Bank governor Mervyn King during the question and answer session that followed his inflation report briefing that might cause the odd homeowner or two to worry.
 
He confirmed that the special mortgage liquidity scheme that had been set up to help banks and building societies to fund mortgage deals will come to an end, as planned, next January. There will be no extension, he confirmed.
 
This has triggered fears that mortgages will dry up and mortgage rates will rise sharply towards the end of the year because lenders will struggle to borrow from wholesale markets to fund deals. In other words there will be no link between Bank Rate and mortgage rates come February 2011.
 
Lenders who need to repay money they have borrowed from the scheme will not be able to lend. Those that were not involved in the scheme will raise rates on mortgage deals, not only because they can, due to a lack of competition, but because they will not want to be swamped by applications if a deal is too good to miss.
 
The progress that has been made in improving mortgage availability over the past year will be undone – and we will go back to how it was at the start of the financial crisis when many lenders effectively closed their doors to borrowers.
 
Of course, lenders are already warning about a funding gap to the tune of £300bn and it wants something to be done.
 
Some brokers have suggested that Mr King is playing a game of poker and that he is not going to give lenders any indication that he will change his mind with a year to go before the scheme is due to end.
 
He wants to get his money back. Mortgage borrowers should be hoping that he has another card up his sleeve by the time January 2011 comes around, otherwise much higher mortgage bills look inevitable.

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