The euro is being sold off by the bucket load today. German ministers have claimed that Greece is unlikely to make it through the summer without defaulting. Success for the euro-sceptic True Finns party in the Finnish parliamentary elections has created further uncertainty around the recent Portuguese bailout request. Moody’s rating agency has also downgraded Irish debt to junk status today. All this on what was supposed to be a relatively quiet session!
Investors have been spooked by reports from the Greek media that Greece recently told the EU and the IMF that it wanted to restructure its debt. The story was denied by officials in Athens, but the damage had already been done.
Should such an event occur, it would be the first debt restructuring in the EU’s fairly brief history, which in the absence of precedent carries with it very real concerns. If Greece defaults, who would bet against Portugal and Ireland defaulting? Spanish debt has held up fairly well in the wake of the Portuguese bailout request, but contagion to Portugal’s Iberian counterpart remains a constant threat.
BBC business editor Robert Peston’s blog on Friday noted the risks of peripheral defaults to Germany. The German economy is performing robustly at present, but the German banking system is actually quite vulnerable, and Peston’s point about their exposure to peripheral debt is a good one. A debt restructuring would mean a haircut for creditors like German banks, so the German people should be careful about toughening up on its struggling eurozone friends!
As a result of today’s news, the euro has fallen sharply across the board. Against the dollar, the single currency has fallen by nearly 1.5%, and almost 1% against sterling. Asian sovereign buyers have been very willing to buy on euro dips, and have also been particularly resilient to eurozone debt issues in recent months.
We expect euro will find some support in the Asian session, though recouping all of today’s losses will require a serious show of faith.
Richard Driver
Analyst – Caxton FX
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