Greece Will Keep Euro On The Slide. By Nicholas Hastings
Greece is like an albatross hanging around the euro's neck.
Forget successful auctions in Ireland or bill issues in Spain, or even higher than expected second-quarter growth in Germany.
Instead, international investors remain convinced that the Greek economic restructuring is not going to work and that the country will still default on its debts.
The evidence is there for all to see in the price for insuring Greek debt.
Instead of falling in recent weeks as tensions over the sovereign debt crisis in the euro zone have eased, the cost of Greek credit default swaps has remained firmly over 800 basis points.
Not only is this higher--up to a factor of six--than the cost of insuring most other euro-zone debt, but it has continued to increase even after countries such as Spain and Ireland tapped the financial markets successfully this week.
On Wednesday, the cost of Greek CDS rose to as much as 826 basis points after closing lower Tuesday at 804, completely undermining any hopes that the sovereign debt crisis is going away.
In fact, tensions over the crisis could increase, especially as forward-looking surveys suggest that euro-zone growth could fall off a cliff in the second half of this year, making conditions even more difficult for those countries struggling to pay their debt.
A hint of the problems to come were flagged in the latest ZEW business sentiment survey from Germany this week, which showed that while current market conditions might be much better than expected, economic expectations were much lower than forecast.
So even though the euro may have staged a little bounce on the news that Spain and Ireland had successfully completed their latest round of funding, market attention has quickly refocused on Moody's warning over Spain's fiscal outlook and the admission by the Bank of Ireland governor that the country's domestic banking system needs more capital.
News that the European Central Bank's overnight borrowing reached a three-month high this week will also have injected fresh concerns about the health of European banks in general.
It is not surprising that the euro, which not so long ago looked as though it were headed for $1.35 or higher, now finds itself struggling below $1.30. Even the news from Ireland and Spain wasn't enough to help it back over resistance just above $1.2900.
See how the euro has slipped against the dollar in recent weeks:
Click Image to Enlarge
While a further decline against the U.S. dollar is more than likely, especially if the U.S. Federal Reserve doesn't raise expectations of further quantitative easing, the euro could find that fiscal fears about Greece keep it sinking particularly fast against the currencies of countries where fiscal rectitude remains the rule, such as the Norwegian krone and the Canadian dollar.
The euro was taking another hit early Thursday in Europe after a report in German magazine Der Spiegel suggested that the Greek economy was being dragged down by the country's austerity measures, with unemployment rising to 70% in some places.
By 0645 GMT, the euro has fallen to $1.2813 from $1.2860 late Wednesday in New York, according to EBS.
However, the euro bounced to Y110.09 from Y109.87 after a report in a Japanese newspaper, Sankei, suggested that the Bank of Japan was considering additional easing measures including fresh injections of liquidity. The dollar rose to Y85.91 from Y85.43.
Forget successful auctions in Ireland or bill issues in Spain, or even higher than expected second-quarter growth in Germany.
Instead, international investors remain convinced that the Greek economic restructuring is not going to work and that the country will still default on its debts.
The evidence is there for all to see in the price for insuring Greek debt.
Instead of falling in recent weeks as tensions over the sovereign debt crisis in the euro zone have eased, the cost of Greek credit default swaps has remained firmly over 800 basis points.
Not only is this higher--up to a factor of six--than the cost of insuring most other euro-zone debt, but it has continued to increase even after countries such as Spain and Ireland tapped the financial markets successfully this week.
On Wednesday, the cost of Greek CDS rose to as much as 826 basis points after closing lower Tuesday at 804, completely undermining any hopes that the sovereign debt crisis is going away.
In fact, tensions over the crisis could increase, especially as forward-looking surveys suggest that euro-zone growth could fall off a cliff in the second half of this year, making conditions even more difficult for those countries struggling to pay their debt.
A hint of the problems to come were flagged in the latest ZEW business sentiment survey from Germany this week, which showed that while current market conditions might be much better than expected, economic expectations were much lower than forecast.
So even though the euro may have staged a little bounce on the news that Spain and Ireland had successfully completed their latest round of funding, market attention has quickly refocused on Moody's warning over Spain's fiscal outlook and the admission by the Bank of Ireland governor that the country's domestic banking system needs more capital.
News that the European Central Bank's overnight borrowing reached a three-month high this week will also have injected fresh concerns about the health of European banks in general.
It is not surprising that the euro, which not so long ago looked as though it were headed for $1.35 or higher, now finds itself struggling below $1.30. Even the news from Ireland and Spain wasn't enough to help it back over resistance just above $1.2900.
See how the euro has slipped against the dollar in recent weeks:
Click Image to Enlarge
While a further decline against the U.S. dollar is more than likely, especially if the U.S. Federal Reserve doesn't raise expectations of further quantitative easing, the euro could find that fiscal fears about Greece keep it sinking particularly fast against the currencies of countries where fiscal rectitude remains the rule, such as the Norwegian krone and the Canadian dollar.
The euro was taking another hit early Thursday in Europe after a report in German magazine Der Spiegel suggested that the Greek economy was being dragged down by the country's austerity measures, with unemployment rising to 70% in some places.
By 0645 GMT, the euro has fallen to $1.2813 from $1.2860 late Wednesday in New York, according to EBS.
However, the euro bounced to Y110.09 from Y109.87 after a report in a Japanese newspaper, Sankei, suggested that the Bank of Japan was considering additional easing measures including fresh injections of liquidity. The dollar rose to Y85.91 from Y85.43.
- 19 August |
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