DJ Forex Focus: More Reasons To Sell The Euro Now

LONDON (Dow Jones)--Greece's formal request for a financial bailout provides even more reasons for selling the euro than there were before.

Apart from the obvious uncertainties over the terms and the timing of the EUR45 billion loan from the European Union and the International Monetary Fund, financial markets are now faced with the suggestion that a Greek debt restructuring is now more inevitable, that investor interest in the euro zone will fall further, and that euro-zone bond spreads in general will widen.

"The Greek debt problem remains a marathon not a sprint," is how the currency strategy team at Barclays Capital summed it up.

And for the euro, this means the prolonged slide that has taken it down from over $1.50 before the Greek crisis broke, still has some way to go.

See the euro's recent slide:

The first major hurdle will come on May 19, when markets will want confirmation that other euro-zone nations have got approval to start disbursing their share of the package and ensure that Greece can fund redemptions falling due.

There is already concern that the EUR45 billion earmarked will only cover Greece's debts for one year and that the country needs more like EUR90 billion to fund a multi-year adjustment.

These fears that the rescue is all a little too late is already leading to talk that Greece's debts will still have to be restructured to provide the country with a more manageable repayment schedule.

And that is even without the real risk that Germany has difficulty getting parliamentary approval for its rather large share of the total package and that the Greek government is able to impose further austerity measures despite continuing political opposition.

Some analysts point out that this fiscal conditionality will have its own costs for the euro.

"Conditionality increases deflationary pressure within EMU's peripheral, suggesting the euro will weaken via interest rate and yield differentials," said Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London.

Redeker noted that apart from the widening spreads between German and peripheral sovereign bonds, even core euro-zone countries such as Germany itself have little to offer in terms of spreads. Recently, spreads between euro and U.S. corporate bond yields have collapsed, with current levels suggesting a $1.20 target for the euro against its U.S. counterpart.

Certainly, Athens's request for the money has failed to lower investor fears of contagion, with Spain and Portugal seen very much on the 'at risk' register.

With Portugal facing a heavy redemption schedule next month, it could well find the rising cost of servicing its debt prohibitive just at a time when it needs the money the most.

While the G20 finance minister meeting in Washington last week may have been anxious to play down the risks, there is little sign that major investors are convinced.

During his talks at the meeting, People's Bank of China Governor Zhou Xiaochuan expressed deep concern that sovereign debt risk had now become a "major and a real threat."

This was hardly a vote of confidence in the current bailout process and suggests China, which has been a major supporter of the euro in recent years, could soon be losing its interest too.

Early Tuesday, recent pressures on the euro subsided a little after German Chancellor Angela Merkel pledged her support for the single currency and Bundesbank President Axel Weber reassured market that the euro is "not at risk of collapse."

By 0645 GMT, the euro had recovered to trade up at $1.3371 from $1.3364 late Monday in Europe, according to EBS. However, the single currency was still down at Y125.48 from Y125.68.

The dollar fell to Y93.83 from Y94.03, with investors still showing some preference for safe havens, especially given a soft performance in many Asian stock markets.

Bloomberg TNI FRX POV

   Reuters   USD/DJ    Thomson   P/1066 or P/1074 

(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)