We have seen a recent relief rally in the Euro however we feel that the sustainability is highly unlikely due to the following reasons:
The chances of a Greek exit within the next 18 months are now 75% according to world economists. The country will have to calm civil unrest, manage a sovereign default, plan a new currency, recapitalize banks, stem outflow of capital and find ways to pay bills once the funding is withdrawn.
Four major banks in Greece have been granted €18 billion from the ESFS to help them retain their position and continue borrowing from the ECB. This goes to show how keen ministers are to help keep Greece in the Eurozone as a Greek exit would have a ripple effect in global markets. Nevertheless it looks inevitable.
German and French premiers, Merkel and Hollande will meet today to discuss the creation of Eurobonds. The German chancellor is still strongly against the measure and is pushing for stricter austerity measures from the peripheries to help reduce their cost of borrowing and increase investor confidence. Hollande, who is a socialist wants to reduce austerity and increase spending to boost short term growth.
Germany has set a 0% coupon for today’s 2 year bund auction, in affect offering no yields in return for funding. This is proof of the paralytic state of the Eurozone economies, as investors freight to keep the existing value of their wealth instead of seeking returns. Such practice has not been seen since WW2.
The head of the IMF Christine Lagarde suggested that the UK should look to loosen monetary policy in the event of a deeper European crisis. Her speech for the first time points toward the possibility of the European crisis getting worse.
Economies around are world are now starting to show worrying signs as the Euro crisis deepens. A collective interest to keep the crisis at bay may well be required very soon. The obvious route would be extra commitment to the IMF which Japan have already agreed to. How long will it be until the rest is to follow?
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