Greek credit is burning as the euro plays it cool
AT THE beginning of the week, ratings agency S&P downgraded Greece to CCC, a hair’s breadth above default. With it looking likely that bond holders will be asked to contribute to the next bailout for Greece, the country seems to be well and truly up the river tributary without ancillary means of locomotion.
In the rest of the Eurozone, fears of contagion run rife. Alongside Greek 10-year bonds hitting 17.5 per cent – a record in the Eurozone’s history – Portuguese and Irish 10-year bonds are also at record highs of 11.4 per cent and 11.5 per cent respectively.
According to Richard Driver, currency analyst of Caxton FX, “this Greek situation is getting out of hand and looking at Portuguese and Irish bond yields, we are getting a good insight into the inevitable contagion that would follow a Greek default.” Driver adds: “The EU summit on 24 June cannot come quick enough, the stakes are too high for a resolution not to be reached. As high as these bond yields are, as long as a genuine default is avoided this month, we’ll see them calm down.”
Today, the Greek parliament will be presented with a fiscal strategy bill that includes the latest barrage of austerity measures and privatisation plans that the country must adhere to as a precondition of the possibility of any further bailouts.
With Athens facing level of asset stripping reminiscent of the days of King Xerxes of Persia, one might have expected the euro to be in a much more poorly state to that in which it currently finds itself.
While the bond market is punishing the likes of Greece, Portugal and Ireland, the euro has remained stable, even appreciating against the dollar and sterling over recent weeks. But the bond markets and currency markets are very different beasts. According to Kathleen Brooks at Forex.com, there are two main reasons why the euro has fared so well despite the Greek crisis. “The forex market is short termist by nature. Markets seem to have decided that there is enough support for the Greek crisis for the next two years. Secondly, the euro is a currency union. Forex traders are seeing this as a problem in isolation.”
ECB MANOEUVRES
In the long term, one of the biggest issues that could upset what remains of European fiscal co-operation is the handover of the stewardship of the European Central Bank later in the year. According to Andrew Morris, managing director of portfolio manager Signature: “With Trichet due to step down in October, it would seem that the ECB’s charismatic, or arguably enigmatic, head is looking to have his final swansong moment rather than leave under a cloud. Indeed Trichet’s departure at the end of October will leave behind a very difficult legacy.”
In reference to the difficulty of placating the various factions of the EU empire, Morris adds: “The position will need to be filled by someone who can negotiate cordially with all European leaders, who themselves are operating under close public scrutiny. This coming at a time when the EU faces some of its greatest challenges, which could test the fabric of the union, may lead to calls growing for it to fragment or operate on a tiered basis, if rifts widen.”