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Greece Continues to Weigh on Euro

Last updated 1/19/2010 4:30 AM ET (GMT -5) 15 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Greece continued to be the focus of attention at the Eurofin finance ministers meeting in Brussels as officials grappled with an array of policy choices to solve Greece’s mounting fiscal problems. Although the country has pledged to assume tough austerity measures to control its widening deficit, there is growing doubt that Greece can tackle these issues alone given the spotty accounting of its finances.

Although European monetary officials have vehemently denied the possibility of any rescue package, European finance ministers have started to explore that option. One critical barrier to any outright loan package to Greece is the fact that the European Central Bank does not carry a mandate as a lender of last resort and is therefore unable to provide direct assistance to Greece. Last week   ECB Chief Jean Claude Trichet was adamant that the central bank would not be able to relax its rules on collateral indicating that Greek sovereign will not be accepted if its rating fall below investment grade.

With the European commission budget simply too small to offer Greece any meaningful restructuring deal, attention is turning to the possibility of the IMF as the institutional instrument of choice to restructure Greek finances. Although Greece comprises only 3% of the EZ GDP and therefore the threat of its exit from the union would have little economic impact, it is being watched by the market as a test case solution for the broader based fiscal problems of other Southern European economies such as Spain, Portugal and even Italy.

The euro has been hobbled by these issues for the past several sessions as the pair remains capped at the 1.4400 level for now. We continue to believe that the unit could trade heavy for the rest of the week unless it receives a boost from better than expected economic data. Today’s ZEW survey will provide the first glimpse of investor sentiment  in the region, but the true marquee event f the week will be this Thursday’s January flash PMI data for both the manufacturing and services sectors.. Aside from the fiscal problems dogging the region, the euro has been weakened by market concerns that the economic recovery in the 16 member region is beginning  to stall and this week economic releases  could provide further proof to that bearish thesis.

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Comments (15)

alexjbrandt

January 19, 2010 at 04:42 AM ET

Its just one tiny country with a tiny economy out of 16 countries. I think the whole thing is being overblown/worked up more then it really is. Greece defaulting on its debt isn't the end of the world for the euro, since it seems everyone is rushing to sell euros.

schultzz.at

January 19, 2010 at 05:25 AM ET

Greece just comprises about 3% of EA16 GDP as Trichet stressed in the Q&A session after the ECB Governing Council meeting last Thursday. He even remarked that California comprises a much greater share of U.S. GDP in comparison.
However, I am advising any forex trader to take this issue seriously.
The euro came under considerable pressure, I think in 2004, when French voters rejected the EU constitution. I think the Greece story is much more severe, because it shows huge gaps in the EU/Euro Area institutional framework.
Tom Schultz.

alexjbrandt

January 19, 2010 at 05:31 AM ET

California has a GDP that would make it the 8th largest country if it was by itself:

http://en.wikipedia.org/wiki/Comparison_between_U.S._states_and_countries_nominal_GDP

How does it show gaps in the EU institutional frame work? To me, it shows that the EU has a strict monetary policy and not going to bail out a government because its fiscally irresponsible. Which is more then what I can say for my government here in the US and the financial corporations.

alexjbrandt

January 19, 2010 at 05:50 AM ET

To me, holding Greece accountable to its irresponsibility is the best thing to fix the situation, as bailing em out could potentially just prolong the problem and have a domino effect. Bail out one country, pretty soon the others will be wanting bailed out too.

bschlossberg

January 19, 2010 at 06:42 AM ET

That's the problem. If Greece goes Spain will be next and that will break up the euro

Demax

January 19, 2010 at 06:53 AM ET

Boris,

Is your comment along the lines of AEP's view in the Telegraph, where the ECB is 'preparing for a possible boot-out of Greece from the EZ?'

Rajapaksha

January 19, 2010 at 05:23 AM ET

never gonna fall, greece or no greece eauro gonna hold still

aandrew60

January 19, 2010 at 06:52 AM ET

Where is the SNB?

Demax

January 19, 2010 at 06:54 AM ET

In Zurich, and who cares anyway, they have their own currency probs.

alexjbrandt

January 19, 2010 at 06:59 AM ET

I've concluded that the SNB won't show up till it falls below 1.4700. But who knows,.

aandrew60

January 19, 2010 at 07:54 AM ET

It would help the EUR if SNB were to intervene - that is my point. Additionally, Greece is overblown....everyone is so negative on everything out there (partly lay that blame on multiple administrations around the world too). Germany kept all of its employees and keeps outselling the US auto market...the Euro with rise again. These are great opportunities to buy too...

alexjbrandt

January 19, 2010 at 08:05 AM ET

I whole heartily agree.

alexjbrandt

January 19, 2010 at 08:04 AM ET

What we should really ask ourselves is why ratings agencies, in particular Fitch, Moody's and Standard and Poors have been implicitly allowed to fill a quasi-regulatory role with huge authority. Because they are for-profit entities their incentives may be misaligned, and can't be relied upon for an accurate, independent analysis of a institutions credit worthiness. Case in point: They rated certain CDO's with a AAA+ rating, in which they were actually worthless, contributing to our financial crisis.

aandrew60

January 19, 2010 at 10:26 AM ET

I definitely agree Alex - who are these clowns that have created some of the worst issues yet, nobody holds them accountable?

ALEJANDRO

January 19, 2010 at 09:47 AM ET

SNB, MAKE MY WEEK. EURCHF downtrend rally is already overextended (1h), trendline broken (4H), price on breaking point ready for correction 200 SMA, waiting for the SNB to make the move.

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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.