Fitch’s Downgrades Greece
The euro fell near an eleven month low against the US dollar last week as increasing yields on Greek debt prompted speculation among investors that Greece may turn to the EU for help or would possibly default. Greece received another blow from Fitch’s ratings agency which downgraded Greece to BBB-, just above ‘junk’ status. Fitch’s outlook for Greece remains negative. The euro trimmed some of last week’s losses after the EU said it stands ready to help the troubled Athens government. Richard Franulovich of Westpac Banking Corp stated, “The market had no confidence in Greece and thought default was imminent.” The premium investors are demanding to purchase Greek 10 year bonds vs. German bunds rose as high as 442 basis points which is the highest level since the euro was launched in 1999. Greek Prime Minister George Papandreou said that borrowing at current rates is unsustainable. Many believe that intervention is unavoidable. UBS AG Chief European Economist Stephane Deo said, “The recent market action means that an external intervention may be unavoidable and could happen very soon as the situation is untenable.”
Long Term Problems For Euro
On Friday European Union officials said they are ready to help Greece if necessary. EU officials in Brussels are sorting out the details of the earlier EU/IMF agreement. Some fear that the possibility of a Greek bailout will cause investors to steer clear of holding the debt of other troubled EU nations which will pressure the euro further. Win Thin of Brown Brothers Harriman & Co stated, “Bailing out Greece would take some near-term pressure off the euro, but longer term it’s not the end of it. One thing we don’t know is the amount of contagion risk. As we’ve seen in emerging-market crises, it rarely stops at one country. There’s Portugal, Spain — all these other countries in the same queue as Greece.”
EU Finance Ministers to Hold Teleconference Sunday
On Sunday Euro zone finance ministers will hold talks to discuss the details of how a safety net for Greece will work. A lack of clarity in the earlier EU/IMF agreement has caused investor uncertainty. Recently Greece’s Prime Minister said the Athens government will use the safety net if necessary. In addition to the finance ministers the European Central Bank and the European Commission will also participate in the talks. Greek Prime Minister George Papandreou was quoted as saying, “The question remains whether this mechanism will convince markets just as a gun on the table. If it does not convince them, it is a mechanism that is there to be used.” The effects of the talks will likely influence Monday’s trading.
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