Euro Will Sink As Greece Is Pushed To The Brink. By Nicholas Hastings

The scope for further euro losses is growing as hopes for an early resolution to Greece's debt problems fade.

Chances are that negotiations will now drag on until the bitter end, with a rescue package emerging in one form or another only when Greece is on the brink of default.

Up until now, financial markets worked on the assumption that, while negotiations were obviously difficult, at least some form of a bailout would emerge from this week's European Union summit in Brussels.

After all, it was only a week ago that European leaders gave verbal pledges to stand by Greece.

However, German Chancellor Angela Merkel's warning at the weekend of "false expectations" from the summit meeting suggests that Germany's opposition to a bailout is not only hardening, but that all sides appear to be diverging rather than converging.

Apart from its own political concerns, Berlin appears worried that the long-term stability of the euro will be damaged by a legally questionable short-term bailout. Others, though, suggest that this, the largest euro-zone country, isn't doing enough to prevent an even greater problem--a Greek debt default and the risk of a more serious loss of investor support for other euro-zone debtors.

Even suggestions of International Monetary Fund participation in a rescue program appear to be losing attraction. While an IMF program may avoid the problems of a bilateral bailout, request for IMF help still carries a stigma that could damage the whole of the euro-zone creditworthiness in the future.

There are even suggestions that the IMF may not be able to carry Greece on its own. Stephen Jen, a currencies investor at BlueGold Capital Management in London, noted that under current IMF quota arrangements, Greece would be able to raise only $2.5 billion from the IMF.

"This is hardly enough to get Greece through the first two weeks of April," Jen pointed out.

But the bailout isn't the only problem.

Just as any IMF package will include conditionality, so will any euro-zone rescue. In other words, Greece and other highly indebted peripheral countries that may eventually need help will have to adopt fiscal tightening that will pose a serious risk to the euro-zone economic recovery as a while.

France has suggested that Germany should ease its purse strings and stimulate its own economy to help recovery elsewhere.

There is little sign of this happening in a country that has long seen fiscal restraint as a byword of its previous economic success.

In fact, German President Horst Koehler quickly responded to France's call for higher German spending with a suggestion that Germany should pursue more fiscal consolidation at this time and suspend plans to cut taxes next year.

Thus, not only will the risk of deflationary pressures rise in peripheral countries, but they could emerge within the core itself, ensuring that euro-zone interest rates remain down at current historical lows for even longer than expected.

For the euro, this will be nothing but further bad news providing investors with more reason to sell.

See the euro's decline since the start of 2010:



Early Tuesday in Europe, the euro was remaining under pressure as there was little sign of any progress on Greece. Japanese repatriation flows ahead of the end of the fiscal year looked set to work against the single currency as well.

By 0745 GMT, the euro was down at $1.3507 from $1.3554 late on Monday in New York, according to EBS. It was also down at Y121.86 from Y122.21.

The dollar was up at Y90.22 from Y90.15.