The euro has tanked in the last few sessions, it was pushing $1.50 last week but is trading down near $1.43 today. Why? Well, Trichet disappointed in his press conference, and a slide in global commodity prices contributed to an increase in risk aversion. But the Greek debt crisis is primarily responsible. So what’s going on?
It has been widely accepted that Greek debt has been at unsustainable levels for some time now, its bond yields are through the roof. Rumours circulated that Greece was mooting a euro exit, but these have been strongly denied by all Greek and eurozone officials. Nonetheless it seems the power that be have finally concluded that something needs to be done. Various options are available in terms of addressing the Greek debt problem, some softer and shorter-term, some far more unprecedented and risky. It looks as if a genuine restructure of Greek debt has been ruled out, rather its financial rescue plan is to be restructured.
Loan maturity dates could be extended, Greece could have their bailout loan interest rate cut, they could receive additional funding, debt could be written off, or a combination of these and other methods could be used (as explained in an FT Alphaville blog). Talks are taking place this week and we should know more by the middle of next week what is to be done. However, the question remains, are these bailouts working?
The only way these nations- Portugal, Ireland, Greece- can get out of trouble is through economic growth. The eurozone bailouts we have seen, as an Economist blog argues, do what is necessary to avoid total disaster, but little more. The Greek problem is evidence that the current bailout system does not work; Greece received aid - it had to make horrific spending cuts, tax heavily and incur much heightened borrowing costs, making growth impossible. So a year on from Greece’s initial €110bn bailout, Greece is knocking on the door once more.
Ireland could well need to follow Greece in adjusting its bailout plan and we have just seen Portugal request a fresh bailout. Who’s next? Spain is the obvious candidate but thankfully bond yields there are holding up OK, though they are still rising and who knows whether investors will lose their faith.
The bottom line is that growth in the periphery is essential for a genuine fiscal turnaround, and this seems unattainable under the current approach. But what is the alternative? Well, that’s for another blog...
Richard Driver
Analyst – Caxton FX
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