As the Drachmark relief rally runs out of steam — at pixel time it’s trading at $1.27 — RBS’s Alan Ruskin says there are five reasons why the euro will remain depressed. And here they are:
1. A Greek restructuring is almost certainly delayed relative to market thinking before the weekend, but still looks unavoidable. It does not solve the Greek solvency issue, driven by debt dynamics that are probably already beyond the point of no return, even based on a credible effort by Greece to achieve daunting EU/IMF fiscal targets. For all the money in the package it is not entirely clear how such funds would be allocated in the event of a Greek restructuring and the losses incurred at the core’s banking sector, in part because the EU does not want the market contemplating a restructuring.
2. ECB policy principle has been destroyed. Monetary policy is muddled with fiscal policy (much like it has been among the other G4). Even if the ECB sterilises its actions as I am sure they will (negating the liquidity implications of debt purchases), there is no getting away from the view that debt purchases are specifically geared toward influencing the price of money. Equally that they made such a U-turn from Thursday, speaks either to panic or a realisation that events had turned dramatically, challenging the very existence of the EUR.
3. The long-term liquidity measures do add EURs and will leave funds flush. On the other side, the Fed swap lines will add USDs to the system. Nonetheless, at the margin this new supply of EUR is probably a mild EUR negative.
4. Uncertainties over the programme abound and will probably continue to send a negative message about EUR governance. For example, who pays for the bail-out? Is this not a case of adding debt to solve a debt problem in some case “robbing” Peter to pay the very same Peter? Lastly, will the funds be approved by the various Parliaments and at what political price?
5. The package does not solve medium-term problems of a sub-optimum currency area. It cannot solve productivity divergences and associated divergences in growth, external balance and inflation trends. This is absolutely fundamental, and there is no way out of the long-term problems this pose.
Quite.
And while the €750bn Euro Tarp bailout package sounds rather impressive, it is worth remembering that it’s only equivalent to the interest and principle bond payments due from Portugal, Ireland, Italy, Greece and Spain by the end of March 2013.
Related Links:
Wer soll das bezahlen? – FT Alphaville
The dead wolf bounce – FT Alphaville
Towards a United States of Europe – FT Alphaville
ECB statement on ‘measures to address severe tensions in financial markets’ – FT Alphaville