Nobody is taking off their bets against the Euro quite yet.
Short positions against the Euro on the Chicago Mercantile Exchange, which had set a record in January, set a new record in the three weeks that ended on February 9. And judging from the continued pressure on Greek stocks and bonds, the trend is still to short the Euro’s troubles.
During the three week period short contracts on the Euro climbed to 63,000 contracts from 41,000 contracts.
Why is the trend against the Euro likely to continue?
Driving the trend is a belief that the Greek government won’t be able to deliver all the budget cuts and tax increases is promised European Union finance ministers. Those ministers have told the Greece to prepare no deeper cuts and higher taxes in case the country plunks a March 16 review of its progress.
The difference in yields on 10-year Greek government bonds and 10-year German government bonds, the most credit-worthy bonds in Europe, rose to 3.18 percentage points yesterday, February 15, from 3.05 percentage points, so you can see how bond investors are betting that review will go.
The real hurdle, though, will come after the March 16 review. Greece has more than 8 billion Euros of bonds that come due in April and May that the country will need to refinance in the bond market.
Worries about how much the bond market will make Greece pay for rolling over those bonds will keep the pressure on Greek stocks and bonds—and on the Euro.
georic,
You are absolutely correct.
It took the USA about 10 years to figure out the structural deficiencies and the EU is in about that same time frame (treaty 1993, but common money didn’t occur until 2002).
It will likely take longer for the member countries to rationalize the need for a stronger central government because of their relatively longer country self identifications.
Meanwhile, we’ll see severe regional recessions, deinflation and lower than required growth rates. The first test case will be Spain.
YX,
I’m not saying Brazil wouldn’t take a hit. Just that their hit would be smaller.
As far as EU exports go, the falling euro actually helps them. However, I doubt the euro will fall far enough to allow the EU to become a major manufacturing region again.
You know, that’s more or less your Union/Confederation issue.
Greece is just a symptom of the Euro’s structural weakness. The Euro’s goal was to compete with the USD as a global currency by emulating the diversity and size of the US economy. However, they desired to keep their own individual country identity.
The primary problem is two fold. First, the political separation of the union impedes the European Union’s ability to maintain a consistent monetary/fiscal policy.
Second, the European union is “missing” the structure to support individual countries in times of economic recession.
The result is that individual economies are unable to quickly respond to regional economic changes (ie bubbles).
Because of it’s minimal size, the EU can sufficiently deal with the problems of Greece with minimal long term risk. However, the real concern is how the imminent economic issues in Spain will effect the EU and long term policies.
The natural resolution will be a common government to match their common currency, but that’s not currently a viable political option.
Ed:
If China can not export a lot to EU, then it would buy a lot from Brazil either.
I am getting tired of Greece. EU should just expel Greece, let Greece take care of the mess of its own making and keep EU in tact. Remember during the early years, Greece could not get into EU because it could not meet the EU “standard”. It barely squeezed in years later. Maybe Greece never belong to EU. This also put a stop on EU’s (even NATO’s) east-ward expansion.
Jim,
Just looking at China and Brazil, the falling euro stands to have more of a negative impact on China, since 20% of China’s exports go to the EU. In Brazil’s favor, they don’t have that big a concentration in any one trading partner.
That would mean a stronger dollar, and with Japan’s unexpected surprise in 4Q GDP growth… this may put serious pressure on the global carry trade. :/
Jim,
With the potential problems within the European Union related to the PIIGS nation debt problems and the potential fall of the Euro. What do you think of investing in Swiss markets? Would they be seen as a potential safe haven?