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Greece: Dragging Down the Whole Euro Area
By Marek W. Stupka | May 18, 2010
What was perceived by the markets as just another minor debt concern just a few months ago now seems to be a major issue for the future and fate of the whole Eurozone, if not the whole investment world. Greece’s budget deficit announced for last year: 13.6 percent of its GDP!!
Greece’s public finances began unnerve investors late in the end of last year, when the country more than tripled its budget deficit forecast for 2009 to 12.7 percent of gross domestic product. On April 22, the EU made an even higher estimate of Greece’s budget deficit for last year: 13.6 percent of GDP!
Matters worsened when Standard & Poor’s lowered Greece’s credit rating to junk on April 27, and also lowered Portugal to A- and Spain one step to AA.
The EU and International Monetary Fund put together a 110 billion-euro ($136.4 billion) rescue package for Greece on May 2 to prevent spreading the pandemic. About a week later, European leaders drew up an unprecedented emergency fund of as much as 750 billion euros (ECB president, Jean Claude Trichet, announced later that they have a 1 trillion eur package ready) to bail out / back countries facing instability and a program of bond purchases by the European Central Bank.
Europe’s banks have $2.29 trillion at risk in Greece, Italy, Portugal and Spain at the end of 2009, according to figures from the Bank for International Settlements in Basel, Switzerland. French banks have the highest claims, $843 billion, followed by Germany at $520 billion and the U.K. at $227 billion.
If the sovereign-debt crisis continues, European banks and insurers will have to write down their exposure at some point. The major concern investors have with Greece’s sovereign debt is that Greece and other “laggards” in the euro area may have to abandon the common currency in the next few years to spur their economies. Some theories even count with the whole Eurozone abandoning the single currency as such, where every state will be forced to return to its original currency (the one used before entering the EU). This scenario would radically have a sever impact on EU economy and its competitiveness on the global stage.
As a result of these great concerns, the single currency felt to its 4-year low against the dollar, reaching the bottom of 1.2240. Note, however, that once this level was reached, the market shows little evidence of having the momentum to break below the strong support line (fibonacci low) - the pair is now ripe for short- to mid-term trading via THE CANAAL and THE CONFIRMATOR systems, both proprietary to Gepard Investments, Inc.
Major American indices e.g. DJIA and S&Ps were also affected by Europe’s sovereign debt crisis - this fact only stresses how global and interconnected the investment community became since the 2008-2009 financial crisis!
However, the equity markets now seem to show more strength and resilience to the debt spur, recovering slightly, while it seems that it was the Euro currency itself that suffered the most bleeding wounds from investors furious about Greek irresponsibility, and severe consequences this has had on the markets.
On the other hand, many analysts point to the fact that the threat to Europe’s banks is overstated and that the EU’s rescue package will eventually bolster confidence in the Euro currency. There’s little evidence so far that sovereign concerns are cutting into profits for most lending banks. The 10 biggest banks by market value in the euro region earned almost $15 billion in the first quarter, company reports show…
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