Weekly international investment round up to February 16, 2010
The euro coin in your pocket is now some 10% lighter when compared to the US dollar since Greece’s debt crisis took centre stage. From the beginning of the year confidence in the eurozone markets have been shaken as the plot behind its biggest budget deficit holder has come to light affecting even the wider markets such as the MSCI Emerging Markets Index which has declined by 6.5% on fears that others within the region may also struggle to repay their debts.
In order to convince their nervous on-looking audience European leaders will soon begin to outline the actual financial help offered to its fellow struggling member while behind the scenes belatedly insisting that the Greek government take all appropriate steps to slash its debt mountain which is threatening the euro region’s stability.
At 12.7%, Greece’s deficit is more than four times higher than the eurozone’s rules allow and while Greek Prime Minister George Papandreou has laid out his plans to reduce the budgetary deficit by 4% this year the markets appear skeptical that his efforts will prove successful. His immediate measures of raising the average retirement age by two years, freezing all public sector salaries while raising taxes on property, fuel, tobacco and alcohol have already proven deeply unpopular with the Greeks so the expected increased pressure from Brussels on Athens to do more will lead to further unrest.
For many years Greece has spent more than it earned and borrowed the rest through bonds to make up the shortfall. Greece has 8.22 billion euro’s of debt and interest payments due on the 20th April and a further 8.1 billion euro’s due on the 19th May. Usually, the Greek government would simply issue more bonds to repay the old ones thus delaying the problem for another government and generation but with the state of their finances now fully exposed who would be crazy enough to take-up the new bonds with their strong risk of default? Actually, in order to save EU’s centerpiece achievement the Euro currency, this is something their fellow eurozone members may ultimately decide to do.
Just over a year ago before the euro celebrated its 10th birthday I highlighted how the markets were fast pricing in disparages within the eurozone through a widening ‘risk’ gap between the interest rates given on German bonds and those from more heavily indebted eurozone countries with echoes of Noble Prize winning economist Milton Friedman’s prediction that ‘internal contradictions’ would destroy the euro. And in October, following Ireland’s decision to ratify the Lisbon treaty, I commented in my ‘Politicians bearing gifts’ article that ‘beneath the radar the Greeks snap election saw George Papandreou overturn their unpopular government’s slim one-seat majority by promising a crackdown on corruption which is amongst the worst in the EU. Following such economic carnage soothing political promises are prising open Europe’s gleaming Trojan gates, whether their gifts actually bring prosperity or something completely unexpected is yet to be seen.’
Whilst too premature to call this the euro’s final curtain the aspirations of the European Union have now certainly been altered.
