Forex focus: watch out for Greece
Beware Greeks bearing bonds is the message from across the Channel at the moment.
By
Liz Phillips 9:26AM BST 11 May 2011
It’s looking increasingly likely that Greece – and therefore the
European Central Bank (ECB) – will have to face crippling costs to restructure its debt, with ratings agency
Standard & Poor (S&P) downgrading Greece from BB- to B. The worrying factor is that Greek banks hold predominantly Greek government bonds.
As Simon Smith, chief economist of
FxPro says: “Greece is stuck between a rock and a hard place. Greek banks will take the biggest hit from any restructuring. In turn, the ECB – Greek banks having borrowed €94 billion from it – will take a hit on a major restructuring.
“S&P reckon you need to lop 30 to 50 per cent off the Greek debt pile just to pull Greece out of the current nose-dive. In hair-dressing terms, that’s a pretty severe hair-cut.
“There is a sense that Europe’s response to the debt crisis is now verging on the shambolic.”
Greece was the first nation to need a hand-out last time. History could be repeated with Ireland and Portugal not far behind.
As
Caxton FX’s Richard Driver says: “Greek debt levels are unsustainable. They will certainly need more support of some sort. It’s a matter of when and in what form, not if, Greece receives help.”
In recent weeks the euro has shown remarkable resilience in shrugging off any bad news. T
he reasons were that it is being propped up by rich Asian friends buying the currency as an alternative to the US dollar, its relatively high interest rates and the strength of Germany’s economy under-pinning the single currency.
But finally everyone seems to be taking notice of the extent of the debt crisis.
“The worm has started to turn,” comments Jeremy Cook, chief economist at
World First. “And, like a patient lying in a hospital bed with the painkillers wearing off, the markets are starting to take more and more notice of the great big European debt problem.
“The rebound in the euro’s fortunes over the past week has been short and sharp. It’s been the kind of movement which suggests that the market is scared, and they are dumping it with very little care for the consequences.”
With the spotlight once again on how vulnerable the Eurozone really is, the future for the area looks bleak.
As Chris Towner, director of FX Advisory Services at
HiFX notes: “The euro looks vulnerable from a number of angles. The most obvious one is the suffering peripheral economies for whom the rating agencies continue to circle in the air like birds of prey diving in with downgrades.”
He also points out the shaky political will from stronger nations to continue to fund the weaker ones – the Finnish electorate is revolting against hand-outs and Germany’s Angela Merkel is struggling to maintain support politically because of her helpful attitude to the weaker peripheral countries.
Her problems will only get worse if Germany’s export trade is knocked by higher wage and energy costs and a strong euro.
Mr Towner adds:
“It is also important to add that the sovereign debt crisis does not need to spread any further into Spain or Italy. If it were to spread into these economies then the sovereign debt crisis would become even more alarming; however the point here is that the alert is already bright red due to Greece, Ireland and more recently Portugal.”
ECB President Jean Claude-Trichet didn’t help either by suddenly announcing at the end of last week that a further rate rise was not ear-marked for the next month or so, causing a sell-off of the single currency. The euro is now on the back foot.
And that wasn’t the only bad news.
“On Friday rumours swept the currency markets that an emergency meeting could see Greece pull out of the euro. This heaped more pressure on the euro and it has dropped by nearly six cents in just over three trading days,” says Mark O'Sullivan, group head of dealing and products at
Currencies Direct.
“The great thing about the ECB and the euro politicians is that they continue to peddle the same story: that the countries that had sought a bail-out -
Greece, Portugal and Ireland - didn’t really have that much effect when it came to total Eurozone GDP.
“This is true, but what
they failed to acknowledge is the 'iceberg effect' these countries have. The tip of the iceberg is their total input to Eurozone GDP, but under the water the debt they owe is huge, to the point that a default from all three of these nations would cause
a global implosion.
“To add even more uncertainty, the newly elected Finnish government have come out and publically stated that Eurozone bail-outs are nothing more than a 'Ponzi scheme', with taxpayer’s money being used to fund countries that have no real means to pay off their debts and need a constant source of bail-outs just to meet their on-going debt requirements.
“The elephant in the room is Spain and Italy. Both have different problems and day by day the yields the market demand to lend to these nations continue to rise. So the PIGS, who have been ridiculed by their northern neighbours for poor fiscal policy, have suddenly pulled a gun from under the table and held it to their heads, threatening to pull the trigger unless they get some kind of debt forgiveness.”
And where does all this leave sterling – within the EU but not in the euro club? Could the pound be seen as an alternative?
HiFX’s Chris Towner thinks so. “Sterling looks far more attractive as an alternative. The UK has of course its own issues, but at least these issues are being addressed, and at least we have a currency that weakens in reaction to a crisis rather than strengthens.”
