ECB considers raising insurance demanded for Greek funding

The euro fell across the board on Tuesday, as details emerged on a European Central Bank proposal to increase the insurance it would demand in return for emergency funding to Greek banks.

Bloomberg, citing sources, reported that the ECB staff have prepared a proposal to increase the haircut on the security that Greek banks offer in return for emergency liquidity. The report deepened worries that Greece was heading towards a cash crunch which would force it to default on its debt and eventually exit the currency union.

With Greece at the forefront, political risks overshadowed a mixed German Zew survey, traders said. The euro was down 0.5 per cent against the dollar at $1.0688 , its second straight day of losses. It was also weaker against the yen at 127.65 yen while against the safe-haven Swiss franc it was down 0.2 per cent at 1.0255 francs not far from its lowest in nearly three months.

"The ECB study report just added to the worries that are surrounding Greece and dragged the euro lower," said Alvin Tan, currency strategist at Societe Generale. "A good indicator of how worried investors are, you just have to take a look at the euro/Swiss."

The single currency took a hit on Monday after public sector entities in Greece were ordered to transfer idle reserves to the central bank to help alleviate a cash squeeze.

Athens is in negotiations with its euro zone partners and the International Monetary Fund over reforms required to unlock remaining bailout funds before it runs out of cash and loses its ability to repay debt.

"The negative headlines about Greece, in the absence of anything major, are driving investors to pare positions in the euro," said Geoffrey Yu, currency strategist at UBS. The latest development in the Greek debt saga came after the euro had climbed 1.9 per cent against the dollar last week amid a pullback in expectations for a June interest rate hike by the Federal Reserve.

Mr Tan at Societe Generale said the German Zew economic sentiment did little to help the euro. Mannheim-based think tank Zew said its monthly survey of economic sentiment fell to 53.3 points from 54.8 in March, undershooting a forecast of 55.3 points.

Reuters