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Euro Tumbles as Pressure Builds on Greece

Last updated 1/6/2010 2:36 AM ET (GMT -5) 2 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Jurgen Stark a member of the ECB’s Executive Board  stated emphatically that the EU will not save Greece, triggering a massive selloff in the EUR/USD which tumbled more than 50 points below the 1.4300 level within minutes of the news. Mr. Stark noted that a liquidity injection would have negative consequences for European stock markets and  also stated while the European economy has improved the recovery remains uncertain.

Less than a month ago Mr. Stark noted that, “we have 10 days and one year to address this question,(of accepting Greek collateral) ", with ECB committing to accepting Greek BBB rated securities in its refinancing operations until the end of 2010.  Today’s unmistakably direct comments by Mr. Stark are a clear sign that European monetary officials want to serve notice to Greek fiscal authorities to get their budget in order.

Despite M. Starks’ bluster it is difficult to determine the exact implications of his words.  Greece is an EU member and is therefore bound to the union by a series of treaties. A financial failure by one of the union’s members, would be the first such occurrence since the introduction of the euro and could put tremendous stress on the currency as a whole.

The financial problems with Greece expose the weakness in the North South divide in the union with fiscal conditions in Spain, Portugal and Italy considerably worse than those in Germany, France and Netherlands and euro’s  status as a currency without a country comes under assault every time fiscal difficulties create political tensions in the union.

Nevertheless, tonight’s fireworks are merely an opening gambit in further negotiations with Greece and will  likelybecome resolved especially if the region’s economy continues to recover in 2010 ameliorating some of the fiscal problems. Still, the concerns regarding the fiscal problems in EU could continue to weigh on the unit until markets see some concrete austerity plans from politicians in the region.

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Comments (2)

schultzz.at

January 06, 2010 at 05:44 AM ET

Greek's debt is still rated A2 by Moody's, two steps above B-level. If the ECB reverts to its pre-crisis collateral policy in 2011, the rating agency would have the power to shut the door for Greek banks. Interestingly, Greece is not auctioning debt to the public at the moment, it is rather selling it in private transactions.
These are just two symptoms that the financial crisis is in some sort of transitional stage.

The European Commission predicts GDP in 2010 at -0.3 for Greece, unemployment at 10.2% and a current account balance of -7.9% of GDP in its autumn 2009 forecast. The numbers for Spain are -0.8 GDP, unemployment 20%, current account -4.6%.
Considering these numbers I have a hard time seeing a 'recovery' as far as these economies are concerned.

bschlossberg

January 06, 2010 at 10:44 AM ET

Agreed. Its all relative however. If the North does better, the South will see some uptake on just expanded demand especially in tourism which is 15% of Greek GDP.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.