Greece Crisis Pushing Euro to New Lows

April 23, 2010 - PRLog -- From http://forexcare.net/. The Euro was sharply down Friday 22 April 2010 thanks to more bad news from a source that most traders are getting pretty bored to talk about: Greece. It hit $1.3260, its lowest level since 7 May 2009.

We knew that the sovereign debt (ie government debt) problem was pretty bad – debts that are already probably untenable, with ongoing deficits that will continue to make it worse.

But now we hear that it is even worse than suspected. The European Statistics agency, Eurostat, has revised estimates up for the budget deficit in 2009, from 12.9% to 13.6%. It said that figure may be revised up 0.5 per cent, we can only assume due to all the book cooking that has gone on before. To their credit, we should state the new socialist Greek government has been seeking to come clean and get a handle on this problem – but frankly it may be too late.
Greece Debt Crisis

Greece Debt Crisis - Pushing the Euro to New Lows

Moody’s responded by further downgrading Greece’s sovereign credit ratings from A2 to A3. Not suprisingly Greek borrowing costs then spiked. The 2 year note was trading over 10% interest, a far cry from the under 3% rates that was normaly for Eurozone countries in the good old days.

HuffingtonPost.com reports that this is likely to push Greece to formally seek EU help, all while civil unrest (protests and strikes) increase.

The Euro traded up 0.5% today (Fri 23 April) after the Ifo Institute announced the highest reading on German business confidence for 2 years.

The fact of the matter is, however, that the G-word is not going to go away any time soon. Greece is only the start of this process, in fact, and not the end.

10% + borrowing costs indicate that the market already expects a restructuring of Greek debt, and any sane economic analysis will probably lead you to the same conclusion.

And as this Wall St Journal analysis suggests, the markets have now woken up to the fact that defaults are not just the domain of rickety emerging economies, as has been the case since Mexico defaulted in 1982. Most emerging economies have cleaned up their house after painful lessons on austerity, while developed economies effectively gorged on debt.

Today the Eurozone is most at risk for two reasons.

Firstly, Greece is not alone. Oxford Economics estimate that by 2014, total Eurozone debt will exceed 88% of GDP – even without a Greek default. At that stage,Italy would have a 126% debt-to-GDP ratio, actually higher than Greece at 116%, and followed by Belgium at 109%, Portugal at 102%, France at 100% Ireland at 89% and Spain at 81%.

Pretty hefty numbers, right. Even Germany, the richest economy in Eurozone that was looked to for bailouts (an ‘opportunity’ it has effectively declined), weighs in at 74%, not particularly healthy.

Compare that to what the IMF-World Bank model suggests is a healthy debt level for a strong economy; 50% of GDP, two times exports and three times government revenues.

If we are generous we would say that is a challenge. If we are nervous, and we suspect markets will get more and more nervy, then we would say that is untenable.

And remember these are rosy estimates, with no negative Black Swans in the picture. Throw in a surprise or two (and Sod’s Law states that if something can go wrong it will), say Greece or Portugal defaults, another large bank fails, or something else even more unexpected, and that picture can only get worse.

Of course these fears could also lead to positive Black Swans – such as politicians actually deciding they have no choice but to deal with the problem, stomach some stiff medicine and clena up their nations finances. While this could happen – and we hope it does – we are probably still a year or two away from that possiblity.

Which brings us to the second problem.  The Eurozone has a structural crisis, according to this EconomyWatch.com analysis. Put simply, the problem is that the Euro is a currency based on a monetary union, with a European Central Bank, but not a fiscal union.

To read the rest of this story, go to:

http://forexcare.net/greece-debt-crisis-pushing-euro-lows/

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