Euro Woes Deepen

Currencies Direct May 17th 2012 - 2 minute read

Confidence in the Eurozone has
received a further blow as the European Central Bank has stopped offering
liquidity to some Greek banks that it does not consider solvent.  The move
by the ECB is in line with the EU treaty; however the headlines will be an
untimely blow as the EU group scrambles to keep the Euro together.  The
proposed new elections in Greece on June 17 look set to be won by parties
favouring opposition to austerity measures which would likely lead to Greece
crashing out of the Euro in a disorderly fashion.  The market is naturally
already pricing in this scenario and the Euro has depreciated significantly and
the borrowing costs in Spain and Italy have moved higher as contagion worries
increase.  There is real concern that a run on Greek banks ahead of the
elections could tip the balance.  Contingencies for a Greek exit are
rapidly taking shape-broker Icap is already set up to trade the Drachma in the
eventuality of a Greek exit.

The repercussions of a disorderly
Greek exit would be severe and of course unknown adding to the
uncertainty.  Mervyn King and David Cameron yesterday blasted the Eurozone
woes- King stated that the Eurozone is “tearing itself apart” as the UK
downgraded its growth forecasts to align with the problems in Europe which is
the UK’s main trading partner.  David Cameron stated that it is “make up
or break up” and the euro is at a “crossroads”.  The change in tone from
King and Cameron will be noted as the gloves are now off as the inability for
Europe to get its house in order shackles the UK economy.

Spain goes to the well this morning
and the auction will set the tone for the day- if the well is dry and there is
limited uptake; then expect the Euro to come under further pressure.  The
escalating concerns on Spanish banks and the exposure to Greece could dissuade
uptake.  Today focus will naturally remain in developments in Europe as
economic data is overshadowed.  The markets are understandably in safe
haven gear with the USD and CHF gaining.



Report by Phil McHugh

Written by
Currencies Direct

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