Finally, some relief for traders who for the last month were inundated by gloomy rhetoric splattered across the financial press. Successful culmination of the Brussels summit has brought with it some renewed hopes for Greece and the euro-project, which until last week appeared to be collapsing under its own weight.
What the Eurozone meeting has drawn up is no ‘Marshall Plan’, but it promises measures that have the potency to reduce the country’s debt burden (120 per cent of GDP). In a nutshell, it would entail re-profiling or swapping debt from shorter maturities to longer ones (15 years to 30 years) – in effect lowering the net present value of debt by 20 per cent. This decline in value would be borne by willing banks that have government debt on their books. In addition, the Greek government has been allowed to buy back its debt at market value from parties that are more than willing to unload their declining holdings. The proceeding also ensured IMF’s second bail-out package amounting to €109 billion.
Focused on this fruitful Greece debate, the euro rose to a two-week high against the dollar to 1.4366. Alongside, the British pound, with its explosive lap on Thursday, also broke its five-week high versus USD, touching 1.6340. European equities similarly recovered during the week, whereas until recently they were beaten to a pulp on contagion fears. The Swiss franc was a bit of a mixed bag though, eroding in value during the first half of the week, only to resume its continuous climb against the dollar and closing at 0.8164 (USDCHF). It is pertinent to note however that CHF, which is considered a safe haven currency during times of turmoil, remains highly overvalued, to a point where it has even outperformed gold since January.
Overall, fundamentals were better than expected in most cases, although markets preferred to follow underlying market sentiment. In the US, new housing starts increased by 14 per cent. Japan, on the other hand, posted a trade surplus during June, reflecting improved industrial production. Even Britain, which is still looking rather weak, fundamentally showed healthy momentum in retail sales.
So, financial calamity is averted, euro rides into the sunset, all is well – or is it? Well, for the time being everyone is relieved over the efforts in Brussels, spearheaded by France and Germany. But once the euphoria wanes, is there a fighting chance for Greece to turn things around and keep them there in the long-run? For starters, the summit discussed just Greece, leaving out other debt-ridden economies for later. Fair enough, Portugal and Ireland can get their own little packages when the time comes, but tackling Spain and Italy’s debt would be an impossible task for ECB to handle on its own. Italy has an outstanding debt of around €2 trillion and would require €175 billion to satisfy its commitments till Dec. Whereas Spain would need about €85 billion euros for servicing its €654 billion debt. Their economies are just too big for bailouts of any kind.
Even the Greek package is not sustainable, as it could lead to massive deflation and could a financial problem into an economic one. Another Marshall plan to pull economies out of the downward spiral would not be possible as the US has its own set of difficulties. To some the European problem is centered on the single-currency, as the confederate states don’t have any mechanism to relinquish the single currency and it is inevitable that some of the weaker economies will end up ditching the euro. The argument does make sense as the euro links together 17 incompatible economies through a single currency, and a single interest rate through a one-size-fit-all philosophy. It’s ridiculous to levy such high interest rates on struggling economies only to keep German inflation in check. It would be much wiser for Greece to leave the euro, revert to its own currency and devise a monetary policy that is better suited to its own economy. Failure to gauge the seriousness of the situation would only leave behind higher debt at extortionate rates for future generations to pay off.
