“The euro faces one of its toughest tests since its creation” says the FT’s Peter Garnham. Despite repeated attempts to reassure the world that it has a credible plan to deal with a huge deficit, markets remain unconvinced. Indeed, Chris Pryce of ratings agency Fitch believes that the position is so bad that the Greeks stand no chance of solving the crisis by themselves, and will soon be “begging the International Monetary Fund for cash”.
And the trouble is, although Greece only represents around 3% of eurozone GDP, the contagion risk is high. Greece may be one of Europe’s biggest financial basket cases after a decade-long consumer-driven borrowing and spending splurge, but it’s far from alone. Debt woes also stalk Ireland, Spain and Portugal. So bad news for Greece doesn’t end in Athens.
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Greece’s fellow eurozone members are hardly falling over themselves to help the stricken state. Germany has so far been at best reticent about the amount and timing of any support. Chancellor Angela Merkel has even hinted that she would happily see the Greeks booted from the club. “We need an agreement under which, as a last resort, it’s possible to exclude a country from the eurozone” she said recently.
The fact that there is no such agreement is the euro’s Achilles heel. Formulating common policy on interest rates, for example, is now nigh-on impossible given the divergence of economic performance across the zone. The ECB will have little choice but to keep rates low for the sake of some of the eurozone’s sickest members, even as the US and other countries start tightening to ward off inflation.
So, one decent play for a spread better is to short the EUR/USD pair. Sure the euro may have steadied recently after a 7% drop against the US dollar. But a renewed slide must be on the cards. Greek woes will see to that.