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Euro continues to remain under severe threat

Monday 7th November 2011

The political wrangling in Greece is nothing but a side show as the euro remains under severe threat.

Here, Jason Gaywood, consultant at currency specialists HiFX explains why...

"After a veritable roller coaster of a week for the euro zone, it would appear we are right back where we were 10 days ago. Back then the Greek Prime Minister George Papandreou stunned political leaders by announcing that the rescue package so painstakingly thrashed out by EU leaders in Brussels the day before would be put to a referendum. Since then there have been countless irate exchanges and calls for his resignation.

"This morning, as dawn breaks on a new trading week, Greek leaders are due to agree who will be their new prime minister to lead a unity Government until polls are held next February. The first job will be to formally embrace punitive austerity measures in return for financial aid from the rest of the euro zone.

"One thing is for sure, regardless of whether the new government ratifies the rescue package agreed by EU leaders last month, the problems for the Euro as a single currency and the EU as a whole are far from over.

"Even if the rescue deal is adopted, the events of this week have masked the inherent flaws within its structure. The deal is a three pronged attempt to put things right. Namely:

1) Increase in the leveraged size of the European Financial Stability Fund (EFSF) to euros 1trillion.

2) 50% write down of Greek debt

3) Increase in the capital reserves of European banks

"On the face of things, these might all sound like good ideas but the harsh reality is that they haven't really been thought through and are seriously flawed as a solution to the issues being faced.

"It's one thing to agree that a Stability Fund of some EUR1 trillion (that's 12 noughts) is required, it's a very different matter to actually come up with the money to back up the rhetoric. It was, perhaps optimistically, hoped that China would ride in like Sir Galahad and plough billions into the fund. The reality would appear to be very different. Beijing have resolutely stated that they will not be putting any money in until the situation in Greece is clarified and even then, there is significant doubt as to whether there is the ability or political will to divert funding from their domestic economy.

"Moreover, once everyone recognises that allowing Greece to effectively write off 50% of it's debt is fairly close to the text book definition of default, the credibility of the whole package has to be seriously challenged. And finally, forcing banks to bolster their own books risks further exacerbating the problem by reducing their ability to lend to businesses.

"In reality, all that was achieved by the emergency summit in Brussels last month was the buying of time - much of that appears to have been used up with nothing more productive than political wrangling. However you dress it up, Greece is already in default and others will follow - the deteriorating situation in Italy threatens to dwarf what we have witnessed so far. Europe must accept this and cease in its futile attempts to stop the inevitable. EU leaders would do well to remember that Argentina declared itself bankrupt in 2001 and after a difficult number of years getting back on its feet, is now enjoying a sustainable boom."

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Editorial Contact Details - Conor Shilling
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