The Euro has given up significant ground over the past two days on Trichet not signaling to another rate rise and rumours of Greece contemplating exit from EU circling around. The rumours started on a German website, which have since been denied by Greece.
A group of top finance officials are meeting today to discuss possible action for Greece and Portugal. Portugal recently became the third nation in the bloc to request a bailout. But the immediate threat to the common currency zone is the solvency of Greece. Currently, Greece is schedule to return to the capital markets for funding in 2012. The current 2 year yield on Greek debt is well of 20%. This is an enormous cost of borrowing, and it will likely go up as the first auction date gets close, due to the uncertainty about Greece ultimately staying in the EU. The German government is reluctant to provide any additional taxpayers funding to Greece and would rather see a debt restructuring. However, the ECB and many other top officials are against such an action due to the widespread fear it would cause in the market.
I’ve written a lot on this topic in the past, and the more I analyse it, the more confident I get that ultimately a country will leave the Euro in the next couple of years. My initial bet was Ireland, and I am still confident that Ireland will be forced to leave. But now the rumours that are being spread about Greece also make sense. The cost of borrowing for Greece is significantly higher than what it was a year ago when it needed to be bailed out. So despite whatever austerity measures Greece may take, they will ultimately be cancelled off by the higher cost of debt. Therefore, either Greece will continued to be bailed out, or the country will need to restructure. A further bailout will be highly unlikely, as the backlash from tax payers will put a huge pressure on politicians to avoid this move. But if this is to happen, it will again cause loss of confidence in the Euro.
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