It has certainly been a long couple of weeks for the Euro and the various players in the interminable tragi-comedy that is the Eurozone debt crisis. The brief position-driven relief rally after the oh-so-predictable Greek ’yes’ votes quickly evaporated in the face of Moody’s downgrades of Portuguese and Irish debt to junk status, and various rating agencies’ expressions of displeasure with the French ‘solution’ for private participation in Greek rollovers. One suspects the political situation in Greece is perhaps much more precarious than many realise. The tipping point at which it becomes politically expedient for Greek politicians to simply say, ‘this is just too tough, let’s default, leave the Euro, and get back to our beloved Drachma’, is closer than we realise. On Monday evening, deputy Greek Finance Minister Economou told parliament that Greece’s Eur 50bn privatisation plan would not reach its targets. Oh, oh.
Alternatively, this also looks like a game of brinkmanship by Greek politicians, who were perhaps only too happy to vote for increased austerity measures, because they know they’ll never actually have to implement them – the mere threat of default will always coerce the rich creditor states to bail-out Greece, as they know the Euro has all been a huge gravy train for their economies – in effect a massive export finance scheme-with low interest rates meaning the periphery has been able to afford their Mercedes, (for instance). This week, of course, all heads turned towards Italy, where tiffs between Berlusconi and his Finance MInister Tremonti seemed to suggest that the mooted Eur 40bn ‘austerity’ package may be stalled or rejected. Cue 10-year BTP yields at 6.00%, the highest for a decade. This seemed to focus minds in Rome, and we’re assured legislation will be passed within days, but doubts are rampant over the efficacy of the plan, with the main body of savings not actually happening before 2013 and much dependency on the future passage of changes to the welfare system-grey areas and black holes spring to mind.
So, unfortunately, I feel the relative respite of yesterday and today has been temporary and we will see further turmoil and volatility as a result of Euro-political sclerosis and procrastination. The usual safe-havens will perform well over the next few weeks and months, (years?), as we move slowly towards the ultimate alternative denouements-a fiscal union, or if Italy faces a bond buyer’s strike, a break-up, as she is too big to save. Sure, there will be more days of relief along the way, but the trend seems set; the smell of real panic was around on Monday and Tuesday and that has already really damaged the market’s psyche, despite the brave face it tries to wear now and again.
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