Foreign Exchange Report : $VIX Fear Index Leaps as Greek Cabinet Rubber-Stamps Euro Bail-Out Referendum, Sending GBP USD Rate Lower

Published: Wednesday, 2 November 2011 07:51 BST - Written by John Cameron

STORY LINK Foreign Exchange Report : $VIX Fear Index Leaps as Greek Cabinet Rubber-Stamps Euro Bail-Out Referendum, Sending GBP USD Rate Lower

The Pound Euro exchange rate (GBP EUR) is 1.1629. The Pound Dollar exchange rate (GBP USD) is 1.5982. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5372.

One story has dominated all others in the currency markets this week - that of the Eurozone’s deepening debt crisis.

Greek Prime Minister George Papandreou caused surprise and alarm amongst global investors when he announced, late on Monday, that he was set to call a popular referendum in his county on whether to accept the terms of the Eurozone’s bail-out package for Greece.

Papandreou’s proposal for a referendum was rubber-stamped by Greece’s cabinet yesterday. The dramatic development is said to have angered French President Nicolas Sarkozy and German Chancellor Angela Merkel, who have worked closely with Papandreou over recent months in an attempt to avert a full scale Greek debt meltdown.

Sarkozy and Merkel have reacted to the news from Greece by summoning Papandreou to an emergency meeting later today, where he will be expected to explain and justify his actions.

The timing of the Greek referendum remains unclear, as does the precise wording of the question which will be asked of Greek voters. Opinion polls in the troubled Hellenic state have shown that the stringent austerity measures, which have been imposed by the EU/ECB/IMF ‘Troika’ as part of the country’s bail-out funding agreement, have been massively unpopular. If the referendum seeks approval for the continuation of such measures, a ’no’ vote is almost certain to be the result, precipitating a Greek debt default, which would have potentially catastrophic knock-on results, with the European banking sector and in particular French banks such as Societe Generale, particularly in danger.

However, other recent Greek opinion polls have suggested that if the referendum seeks a mandate for the country to retain the Euro as its currency, then the majority of the populace would vote ‘yes’.

There has scarcely been such an uncertain set of economic circumstances during the post-war era. This is evidenced by this week’s movements in the $VIX index, (sometimes referred to as the ‘Fear Index‘), which jumped by 22% on Monday and by over 13% during yesterday’s session.


The ‘risk-off’ trading environment saw Germany’s benchmark equities index, the DAX, lose 5% of its value yesterday, whilst Paris’s Cac 40 dropped by an even larger amount. The US Dollar has been the major beneficiary as market participants seek out safe haven assets. This has seen the GBP USD rate settle below the key 1.6000 level once again. Meanwhile, the GBP AUD, GBP NZD and GBP ZAR rates have tested higher as investors shift out of riskier assets. Further upside is likely for these three pairs as the week progresses unless the Eurozone rapidly sorts this mess out. Given recent events, this would appear unlikely.


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