Spread betters should short the euro
Tim Bennett Feb 21, 2012
The euro hit a three-month high against the Japanese yen earlier today, and rose against the dollar too. Why?
Short-term euphoria has greeted news that a Greek crisis has been averted after euro-area finance ministers agreed a second bail-out package. But don’t be fooled – there is no short-term solution to the Greek problem. And there are precious few reasons to be a euro bull.
€130bn: that’s the huge new amount weary finance ministers agreed to offer Greece. It will prevent an immediate default, and keep the Greeks inside the eurozone for now. But no one’s really been fooled into thinking this solves any of the country’s underlying problems.
Two immediate barriers to this working are apparent even as the details of what has been agreed emerge. First off, it must have taken a huge amount of pressure on Greek bondholders to tide the country past its next big debt redemption in a few weeks' time. By not insisting on full repayment, Greece’s privately-held debt creditors have now written off around 53% of the amount they are owed, according to the Wall Street Journal.
This deal took hours to hammer out, and that’s because there can’t now be much goodwill left to call on from that part of the market when the Greeks are back again, cap in hand, to ask for more time, more money, or both. And they will be – because this package comes at quite a price.
In return for the money, an already restless and at times violent Greek population will have to accept deeper public spending cuts and other austerity measures. So, as Rabobank puts it: "Implementation of the agreed measures by the Greek government will likely hit periodic hurdles along the way, just as the first support package has, as payments have become due."
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It’s one thing to announce austerity measures, but quite another to implement them; not to mention assess the true effect on the debt-to-GDP ratio in a country as bureaucratically chaotic as Greece. It says something about the parlous state of the economy that, according to this latest deal, Europe will be celebrating if the Greeks can get their debt levels down to 120% of GDP by 2020.
And here’s the rub: how can a package of measures that includes wage cuts - to make the economy more competitive and stimulate the export boom needed to get the Greek economy out of its debt hole - achieve a reduction in public debt levels? The two goals are incompatible.
Indeed, near-term debt-to-GDP levels could rise sharply, something the International Monetary Fund has noted. The only way it seems anyone can agree to get Greek debt-to-GDP ratios down is to inflict pain on its lenders so that debt levels reduce. That’s not going to wash for much longer.
Sure, some short-term relief for the euro was inevitable the moment some sort of deal that kept Greece afloat was announced. But as Nikolas Xenofontos, currency analyst at easyforex.com, notes, the euro will soon start to slip “as the markets realise that the eurozone’s wounds are much deeper, and more action and time is needed for anything to change fundamentally. This is certainly not the turning point for euro.”