Risk aversion remains the main theme across the money markets this week with equity market continuing to slide and the safe havens of the US Dollar and Japanese Yen performing strongly. Very positive German GDP yesterday gave the euro a boost in early trading but again developments in Greece have swamped any positive euro related news and driven the euro lower against the Dollar and Sterling.

News of large euro outflows out of Greece by citizens is not helping the nagging feeling that a Greek exit from the eurozone is approaching faster than European politicians would like.

They have desperately tried to manage the situation to ensure that if the worst did happen, Greece leaving could be orderly.

The fear is now that politicians no longer have the ability to manage the situation and a disorderly exit may now be on the cards.

The Bank of England inflation report is due today at 10.30.

We have covered what the Governor is likely to outline, namely lower that expected growth and higher than expected inflation.

The market has already built that into Sterling and the news will probably play second fiddle to news coming from the eurozone for the rest of the week.

European money markets have fallen as the continuing political uncertainty in Greece and Spain undermines investor confidence.Greek President Karolos Papoulias failed to form a coalition government through talks on Sunday and will continue discussions with political leaders on Monday evening.

Bank shares are worst hit, particularly in Spain and France, with Madrid’s Ibex index down 2.8% and the CAC down 2.3%. London’s FT 100 share index is down 1.7% and Germany’s Dax down 2%.

French banks were among the biggest fallers as investors worried about their exposure to other troubled eurozone countries. BNP Paribas was 3.4% lower, Societe Generale lost 3.3% and Credit Agricole fell 3.4%.

Spanish banks Banco Santander and Bankia were down 3.4% and 4.4% respectively, as they said they would set aside an extra £2.16 billion (2.7 billion euros) £1.68 billion euros respectively to meet new government requirements aimed at cleaning up the country’s ailing property market.

Meanwhile, both Spain and Italy carried out successful bond auctions on Monday.

Appetite for Spanish and Italian debt was more than strong enough, but the return demanded by investors in Spain’s debt was higher than in previous auctions, reflecting a dip in confidence.

The difference in the rate demanded by Spanish 10 year bond investors over the equivalent German bunds hit 4.83%, its highest level since the creation of the euro.

The yield, or interest rate, on Spain’s key 10 year bonds, which are traded on the market, jumped 23 basis points to a record high of 6.22%.

Greece’s lack of a government puts in doubt its ability to stick to austerity measures imposed as part of its financial bailout. Without holding to agreed cuts it will not get the rest of the support funds it needs to function.

Adding to the lack of clarity is the fact that anti-bailout parties did well in the elections.

Anti-austerity feeling may be growing in Germany as well as Chancellor Angela Merkel’s party suffered a defeat on Sunday in an election in North Rhine-Westphalia, the country’s most populous state.

Developments in France, Greece and Spain continue to weigh on euro sentiment, driving the single currency lower across the board. Investors continue to be risk adverse as European voters take their toll on austerity loving- politicians.

The Spanish government has part-nationalised stricken lender Bankia, taking a 45 per cent stake in exchange for €4.5 billion in emergency loans and we can expect this to be the first of several injections of capital by the Spanish authorities into their struggling banking sector.

The search for a Greek government also looks set to drag on, after the second placed Syriza party in the recent elections failed to form a coalition.

The mandate now looks set to pass to the third placed Socialists in a ludicrous game of pass the parcel, with every failure racheting up the pressure to find a solution.

Much needed bail-out funds are being withheld until a government is in place, but with no end in sight to the election merry-go-round, EU officials need to act quickly to avoid making the situation worse than it already is.

This morning is an important one for Sterling with Industrial Production data due along with the Bank of England announcement on interest rates and the asset purchase scheme at midday.

The IP number for March is expected to show further declines in output but a number to the upside is a possibility after the rebound in construction in the last two months.

As we’ve mentioned before this week, it would be a huge surprise if the Bank of England made any changes to rates or QE.

Australian employment came in much better than expected, 4.9% against expectations of 5.3% catching the markets completely on the wrong side.

The AUD is off around 4% against the USD and GBP over the last few weeks after the central bank cut interest rates and looks set to cut further this year.

The market was quite short the Aussie, and the buying back of those positions has forced a quick 50 point rally overnight.

Voters in France and Greece joined their counterparts in Ireland, Portugal, Spain, Italy and the Netherlands in forcing out leaders or ruling parties over the past two years. Changes in leadership across the eurozone have generally been Euro negative in the immediate aftermath as the markets digest the change in leadership and the euro is pushing towards the key level of 1.30 against the Dollar in early trading this morning.

The French public elected Francois Hollande, the socialist candidate, and a key pledge was to renegotiate the ‘fiscal pact’ agreed by members of the single currency.

The money markets remain nervous of the possibility of renegotiation mostly because of the uncertainty it would create and how it would affect the strong ties forged between Mr Hollande’s predecessor and the German Chancellor.

Also adding to negative euro sentiment is the non-result from the Greek election.

No party secured enough of the vote to form a government.

New Democracy, who polled the most votes of all the parties has not been able to persuade other to form a coalition so it now falls to second place – the radical Syriza party – to try to form a government.

As many in the market have worried, an anti-austerity party in a position of power brings a Greek exit from the euro that much closer.

Away from Europe, the Bank of England meets on Thursday to decide interest rates and the asset purchase scheme. No change is expected to either.

We also have the GDP estimate on Thursday expected to show a return to growth, and also the PPI figures on Friday.

There is little important economic data from the US this week but in Australia we have the budget and employment data out later in the week and given the ACB cut rates last month may turn out to be softer than expected.

The euro suffered again overnight as reports in various papers talking up the possibility of Greece badly missing their deficit targets. The news has caused another shift out of the euro as investors have looked for safer places to invest their funds.

The articles, if proven true, will add yet more pressure onto the rest of Europe with major doubts already surrounding the success of the latest bailout for Greece worsening.

However, unlike when Greece was still seeking this bailout, the US Dollar hasn’t been the sole beneficiary.

Sterling has held its own against the Greenback by slipping back only 1 cent compared to the 3 cents it lost last time.

This is partly due to improved sentiment which was kick-started by the US with strong data realises from their jobs sector.

The UK announced its latest employment figures today with the unemployment rate remaining at 8.4%, a set of results which weren’t too bad.

Apart from this, it is another data light day with little of note being released. We can expect the US Dollar to remain strong as fears being to grow about Greece’s latest bailout.

EU officials are desperately trying to convince private holders of Greek bonds to accept a crucial debt swap deal ahead of today’s deadline. In order for Greece to receive a second bailout it will need at least two thirds of bondholders to take a 53.5% cut in the value of their holdings and the deal is considered essential in Greece’s attempt to avoid a default.

According to the Institute of Finance yesterday just under 40% of the bond holders had agreed to the new deal leading to a nervy countdown at 8pm GMT deadline later today.

If the total number of bond holders reach the required 66% (approx €150bn) agree to the swap, the government can force the other bond holders to take the haircut too.

Remarkably the euro remains relatively resilient in the face a Greek default up slightly against the Greenback reaching 1.3217.

Back to the UK and Quantitative Easing has knocked £90 billion off pension funds according to National Association of Pension Funds (NAPF).

The news came from two recent studies and blamed lower bond yields and consequently pushing final salary pensions further into the red.

Joanne Segars, Head of the NAPF, said: “Businesses running final-salary pensions are being clouted by QE.  Deficits that were already big now look even bigger because of its artificial distortions.

“Firms are legally obliged to fill the deficits, and that diverts money away from jobs and investment, and will lead to further closures of final salary pensions in the private sector,” she explained.

Finally, today we have interest rate decisions in the UK and Europe both expecting no change and consequently little FX impact.

Reduced revisions to ECB growth forecasts will however, could underpin a more negative tone in this afternoons press conference.

Greek Politicians are applying increasing amounts of pressure to bond holders in a last ditch attempt to obtain the necessary 75 per cent to agree to the terms of the looming bond swap tomorrow.  The Hellenic Republic is threatening to invoke Collective Action Clauses (CACs), agreed by Greek politicians last month, to force through the deal which if used would almost certainly constitute the first sovereign default in Eurozone history.

Any default would trigger credit default swaps on the bonds, a type of insurance that could lead to be very lucrative to those investors refusing to participate in the deal but might also lead to renewed uncertainty in the market.

CDS contracts are traded over the counter and are fairly opaque in nature and it is unclear exactly how many contracts might be triggered and who might be on the other (losing) side of the bet.

The uncertainty is naturally translating into risk-off, with equity markets declining along with the Risk-on currencies such as the euro and Sterling.

The US is once again the big winner, rising across the board over the last few days on a run that can be expected to continue until full details of the bond swap are announced.

It is fortunate given the levels of volatility in the market that both the ECB and Bank of England are unlikely to make any changes to monetary policy at their respective meetings this week.

In Europe interest rates will stay at 1%.  Mario Draghi will hopefully talk in detail about the success of the LTRO but is unlikely to be drawn to talk about Greece, much to the markets disappointment.

The Bank of England is also likely to keep monetary policy on hold; another boost to the asset purchase scheme would be seen as the Bank panicking and would probably do more harm that good at this stage.

Greece has a potentially difficult week ahead as a group of private investors consider the terms and conditions of an arrangement that’s intend to cut €107 billion from the Greek’s €340 billion debt burden.The whole deal hinges on whether the creditors are willing to take a hit of 75% on their holdings in return for a combination of long term Greek bonds and debt issued from the bailout fund.

Due to terms of the second bailout if over a third of the bond holders reject the deal the overall bailout could collapse as per terms put through Government last week.

The reaction from the rest of Europe specifically Austria is now sceptical about the overall viability of the package.

Chancellor Werner Faymann said yesterday that the second bailout is not the end of the matter.

“I would not trust anyone who says that for Greece is enough,” Faymann told Austrian media.

“For Greece it depends on whether they can stick to these measures over several elections.”

Greece will begin voting at the end of this month with a general election in the offing.

In the interim, Greek officials are required to gain the backing of a minimum of 2/3 of its private holders by Friday to employ the debt swap and comply with the requirement terms of its second bailout.

Worst case scenario Greece could run out of funds in less than a fortnight and could prompt an unruly and possibly catastrophic default.

As you would expect the news is weighing heavily on the euro right now and has seen EUR/USD slip to 1.3191 from 1.3440 at the same point last week and Sterling is approaching the key psychological figure of 1.20 at 1.1981 against the single European currency.

Money markets will keep a close eye on developments in the med and this will provide the impetus for sentiment this week.

Elsewhere the week is largely dominated by Central Bank interest rate decisions with announcements in Australia, New Zealand UK, Europe and Canada all expecting no change in the overall rate.

Any variance from these expected figures, with any turbulence from Greece and Friday afternoons US Non-farm payroll data could lead to a volatile week for the markets.

Sentiment remains the primary driver of the euro as the single currency sold off sharply in afternoon trading yesterday after Eurozone members decided to delay more than half of the €130bn Greek bail-out funds.  A decision that was supposed to finally put to bed the Greek issue, at least for a couple of months, has managed to calm volatile markets for less than two weeks.

Thirty eight different measures need to be implemented by the Greek government before the remaining €71.5bn is handed over.

This may be as early as next week. But slicing the payment in two allows hardliners in the Netherlands and Germany a foot in the door and the potential for further delays.

It is this uncertainty which is hurting euro sentiment and pushing the Sterling pair back towards the 1.20 level.

Sterling remains stuck in recent trading ranges and as expected this week’s construction and manufacturing PMIs have not moved the Pound at all.

The manufacturing number was lower than expected and was cancelled out by better than expected construction figure this morning.

Next week is huge for big ticket data with the ECB and Bank of England rate decisions and the US non-farm payrolls the highlights.

The Bank of England voted as expected to keep interest rates on hold and this decision was achieved with a unanimous 9-0 decision implying that the base interest rates will not be rising anytime in the near future. A slight weakening factor for Sterling as an increase to the interest rate would add to the underlying value of the currency.

This hardly came as a surprise as an increase in the rate would cripple growth in what are troubled times.

The more interesting vote was the 7-2 result over quantitative easing.

Seven members voted in favour of the £50 billion extra that has been pumped in while 2 members (David Miles and Adam Posen) wanted £75 billion to be added.

This caused most of this morning’s weakness in Sterling as there is potential that more QE could be pushed into the UK economy.

The BoE also sees credit remaining tight and looks for global growth to weaken.

Wise Money had to mention the Greek saga which seems to be coming to a close, but the main talking point will be if problems re-open looking ahead to the rest of the year.

It is thought the new loan of €130 billion will cover Greece in the short term, but what will happen when that starts to run out.

Various countries that form the IMF are looking for officials from the European Union, ECB and IMF to monitor the Greek government from Athens and make sure the cuts actually take place.